TURKEY S DAIRY SECTOR: PAINFUL GROWING BUT NEW OPPORTUNITIES AHEAD?

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1 TURKEY S DAIRY SECTOR: PAINFUL GROWING BUT NEW OPPORTUNITIES AHEAD? Client Prospectus: A Special Study by Informa Economics & SERES International August 2013 This multi-client study is a joint product of Seres International Agriculture Consulting (Seres) and Informa Economics, Inc. (Informa) and is part of a series of studies of specific sectors of Turkish agriculture. In addition to this study that highlights the Turkish dairy complex; other studies will focus on the Turkish wheat, pulses and cotton sectors. Turkey is at the nexus of European, Black Sea, Asian and Middle Eastern trade. Moreover, as traders and investors look beyond the BRIC countries for global growth and development, Turkey is always included in the list of countries under consideration as representative of the next wave of economic growth and development. But events surrounding the occupation of Istanbul s Gezi Park have surprised observers of the region, especially so as Turkey has been a bulwark of stability in a region that has been decidedly unstable in recent years. Against this backdrop, the question of where Turkey s agriculture sector is headed is of critical importance. How much will economic growth increase agricultural production? Will domestic agricultural production match domestic consumption? How does dairy fit into the agricultural sector? Will its importance increase or decrease with the expected economic growth? Where does Turkey fit into the global dairy trade picture? Are there investment opportunities in the dairy sector and if so, where? In this multi-client study, the focus will be on the Turkish dairy sector and these and many other questions will be addressed. Please join us in this unique study and gain insight into the Turkish dairy sector.

2 INTRODUCTION The geography of Turkey offers high potential for animal breeding and dairy farming operations. This advantage led to higher dairy production in the 1980 s primarily by increasing cow numbers while the yield per cow was steady. From the 1990 s to the second half of last decade Turkish livestock production, including dairy fluctuated tremendously. Since then, support measures which were applied simultaneously to both animal breeding and feed crop production encouraged increases in the livestock sector. Thus, in the last two years there has been a significant increase in the animal inventory data with the increase ranging between 9-17%. While the overall milk cow population scaled up by 10%, to 5,2 million head, dairy sheep population rose to 13,1 million head, an over 13% increase from The market value of animal products and livestock showed a steady upward trend and reached 39,2 billion TL and 25,5 billion TL respectively. Exhibit 1 Exhibit 2 Source: Turkstat 2

3 Exhibit 3 Breakdown of Milk Production, % Cow Milk Sheep Milk Goat Milk Buffalo Milk Source: Turkstat Likewise, supporting the production of unprocessed milk has been a significant stimulating factor. An interest rate reduction of 100 % for investment credits to milk cow breeding with a long grace period has boosted milk processing capacities. Furthermore, logistics investments and speeding up collection of milk has been a key point because of food safety issues was the fifth consecutive year of steady increases in milk production. The increase in population of dairy animals combined with improved lactation yields are both driving production higher. Collection of milk by integrated processing facilities is concentrated mainly in western, southern and south central regions of Turkey. Annual collected amounts in İzmir, Balıkesir, Konya, Aydın, Çanakkale, Denizli and Burdur exceeds 300,000 tons currently, Tekirdağ, Edirne, Kırklareli, Bursa, Manisa and Aksaray were emerging centers in

4 Exhibit 4: Major Milk Collection Centers Source: Central Union of Milk Producers As far as feed supply is concerned, production of concentrate feed grew by 16 and 11% in 2011 and 2012 respectively. Milk cattle feed production expanded nearly 13% in 2012 compared to the previous year. Being the major component of milk production cost, mixed feed prices jumped up by 30% in 2011 which was the highest change since In recent years there has not been a reasonable parity between raw milk and feed prices, compared to the historical relationship. This may be considered a risk in terms of sustainability of the sector. On the other hand raw milk prices prevail at 470 $US/ton as of July The parity between retail prices and raw milk prices has been in the range of 2,6 to 2,7 since Exhibit 5 4

5 Source: Turkstat The Producer Price Indices (PPI) for dairy products are markedly below the overall PPI numbers of the agriculture sector and livestock/livestock products for the same base year. The trend in PPI for dairy products has differed from the trends in PPI for general agricultural products, and for the animal/animal products category. Exhibit 5 above seems to be a signal of a mess in the sector. Over 50% of the dairy farms have 10 head or fewer, which keeps the average cost of production relatively high. On the demand side, registered data indicate the main commercial consumption lines of milk are the drinking milk, cheese and yogurt, which use about 14 million tons of milk equivalents annually. Other traditional products such as butter, crème and ayran (a drink made of yoghurt) account for nearly 1 million tons of milk equivalent. Unregistered production and in-house consumption by individuals is not known exactly. However, registered data shows a steady growth in demand. Estimates indicate that one out of five tons of milk is consumed on farm or in non-commercial channels. The School Milk Project was launched by the Ministry of Food, Agriculture, and Livestock to boost domestic demand. On the foreign trade side, the most recent gateway came from the EU. Turkey has obtained the right to access the EU market after being banned for the last 13 years. Currently, six processing plants meet the required EU standards and can export raw milk and dairy products to the EU. As a major trade partner of Turkey, lifting of the ban imposed by the EU is expected to affect the supply and demand pattern. The lifting of milk quotas in the EU on April 1 st, 2015 will also have a significant impact on regional milk production and trade flows. How these changed milk flows will impact Turkey is a major question. In the long run, The Transatlantic Trade and Investment Partnership (TTIP) Agreement negotiations to be held between the EU and the USA should be one of the key points to watch in this context. 5

6 For the near future, the dairy sector in Turkey may keep growing, but by way of a painful process for stakeholders, particularly for the farmers struggling with input costs. In addition, a major restructuring of the average herd size of farms might be necessary to move production higher. OBJECTIVE OF THE STUDY The main objective of the study is to help decision makers who already have trade relations with Turkey, or are planning to enter the Turkish dairy market. Moreover, suppliers of agricultural and industrial inputs for the whole supply chain will also benefit from this study. Additionally, this study aims to provide a perspective of the Turkish dairy outlook for agricultural NGO s, trading houses, agricultural investment banks and exchanges trading agricultural commodities. PRELIMINARY STUDY SCOPE The study gives quantitative and qualitative up-to-date information as well as forecasts and/or estimates mainly on raw milk and main processed products. Information related to main inputs will be included when needed. Organic production data will be covered in the study. Results of statistical modeling studies for production and consumption projections of major product will be created using one of the suitable modeling techniques including time series, linear/nonlinear regression analysis, artificial neural networks or decision trees. PRELIMINARY OUTLINE I. Executive Summary (Key Findings, Conclusions and Points to Watch) II. Recent Macroeconomic Indicators of Turkey A. GDP Growth Rate B. Inflation Rate C. Income Per Capita Trends and Outlook D. Share of Agricultural Activities Within GDP E. Share of Industrial Activities Within GDP F. Agricultural and Industrial Production Indıces G. Gross Fıxed Investments H. Industrial Capacity Utilization Ratio I. Currency Movements Focused on Key Ag Trading Partners III. Recent Demographic Indicators of Turkey A. Population Growth and Projections by Age Groups B. Structure of Income Distribution by Groups IV. National Policy Overview A. Regulatory and Related Governmental Bodies B. Market Regulations C. Agricultural Subsidies D. Incentives for Investments E. Trade Regulations F. Taxes / Tax Incentives V. National Balance and Outlook to 2020 A. Supply Pattern, Drivers and Projections 6

7 B. Demand Pattern, Drivers and Projections C. Consumer Attitudes VI. Turkey s Relative Global Competitiveness Factor Calculations VII. Production Cost of Raw Milk VIII. Turkey s Price Outlook A. Spot Prices B. Comparison to World Prices C. Agricultural Input Prices IX. Agricultural Investments in Pipeline X. Turkey Within the Macro Environment A. Global Supply and Demand as of Products B. Macro Drivers That Might Impact Turkey C. Long-Term Macro Outlook-Impacts on Turkey XI. Strategıc Considerations and Conclusions XII. Import/Export Opportunities and Challenges A. Investment Opportunities in the Processing Sector. B. Major Risks to the Outlook STUDY TEAM The leader of the team, Mr. Ali Fehmi Soygeniş who has Ph.D. degree in Agricultural Eng. has worked in public and private sector for over 30 years. He has worked for Syngenta Seeds as Crop Manager between Apart from Turkey, he was responsible for Azerbaijan, Kirghizstan, Turkmenistan, Uzbekistan, Tajikistan and Syria. He will manage the study as an external expert. Mr. Tuğrul Atatüre who is an economist worked for Ministry of Custom and Trade over 30 years. He has been in the Department of Investigation and has been the Chairman of the Department and Undersecretary of the Ministry later on. Lastly he worked for a customs brokerage firm in İstanbul as a manager. He participates the study as external consultant. Mr. Bulent Unal who is the Business Development Director of Seres Agri Consulting Ltd. will participate in the study team as a finance expert. INFORMA ECONOMICS TEAM Thomas P. Scott, President and Chief Operating Officer. Mr. Scott has been with Informa since Mr. Scott's specialized work has included business strategy, agribusiness economic development, feasibility and site selection work, as well as various market analyses. In addition to his work in North America, Mr. Scott has extensive experience in the agribusiness sectors of Central Europe, Southeast Asia and South America. He has been involved in many training programs developed and delivered by Informa Economics. Prior to joining the company, he had various assignments in management, trading, logistics and merchandising with Continental Grain Company. He received his bachelor's degree in agricultural economics and business from Cornell University and a master's degree in business administration from the Amos Tuck School of Business Administration at Dartmouth College where he was an Amos Tuck Scholar. 7

8 Juan E. Sacoto, Senior Vice President. With Informa Economics since 1997, Mr. Sacoto is the Leader of Informa s Project Consulting Group. Mr. Sacoto has extensive experience in a wide range of management consulting services across most segments of the global agricultural and food supply chain and related supply chains such as renewable fuels and logistics, among others. Mr. Sacoto s experience and on-work often involves business strategy, risk management, market research, feasibility evaluation, financial and competitive analyses, economic modeling and forecasting, economic development, economic impact, merger and acquisition (M&A) duediligence work, and related management consulting work. Mr. Sacoto has knowledge and experience analyzing many segments of the agriculture and food supply chain including: fertilizer production, seed, farm equipment manufacturing, crop and livestock production economics, sugar refining, grain storage and merchandising, grain and oilseed processing, sugar manufacturing, meat processing, vegetable oils, aquaculture, farmland economics, animal rendering, ethanol and biodiesel, pet food manufacturing, transportation infrastructure, and food consumption, among others. He also has extensive practical experience evaluating agribusinesses across several regions, including the US, Canada, Mexico, Brazil, Argentina, the EU, Mexico, China, Japan, Korea, Ukraine, Russia, and Southeast Africa. He is fluent in Spanish and has broad cross-cultural training. Prior to joining the company, he worked as a financial and equity analyst. He received his bachelor's degree in finance from Jacksonville State University and his master's in international business administration from The University of Memphis. Nate L. Donnay, Director, Dairy Services. Based in Informa Economics' Eagan, Minnesota, office, Mr. Donnay is primarily responsible for fundamental research, analysis and forecasting in the global and domestic dairy markets. In addition to conducting dairy sector analysis, Mr. Donnay works with Informa's dairy sector clients in developing purchasing and pricing strategies for dairy products as well as consulting on long-term strategic planning, policy analysis and dairy-related projects. With the company since 2005, Mr. Donnay received his bachelor's degree in economics from Winona State University and his master's degree in applied economics from Saint Cloud State University in Minnesota. Other professionals will provide their expertise on an as needed basis. PRELIMINARY PROJECT SCHEDULE A tentative schedule is given below and will be adjusted after the signups have been completed. October - Pre Study discussion by flow November Study completed and final report sent to clients and Post Study Webinar to review findings STUDY FEES The study fees are US$4,850. These fees will be billed 50 percent upon the study s initiation and 50 percent upon delivery of the report. 8

9 ENROLLMENT FORM Yes, I want to participate in the multi-client study, Dairy Sector: A Painful Growing but New Opportunities Ahead? The cost of the study is $4,850. One-half of the study fees will be billed upon initiation of the study, and the remaining half will be billed upon delivery of the final report. Please have someone contact me to provide further information. Name: Signature: Title: Company: Street Address: City, State, ZIP: Telephone: Fax: Address: Please Return This Form Via or Fax to: Tom Scott Jim Allwood President and COO Senior Vice President Informa Economics, Inc. Informa Economics, Inc. 775 Ridge Lake Blvd., # Ridge Lake Blvd., #400 Memphis, TN Memphis, TN tom.scott@informaecon.com jim.allwood@informaecon.com 9