Future drivers and trends in dairy and food markets

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1 Future drivers and trends in dairy and food markets IAL 2011 August 2011 Michael Harvey, Senior Analyst

2 Road map Topic 1 Future drivers and trends in dairy and food markets Topic 2 Where is the dairy sector at? Topic 3 Future prospects for Australia s dairy sector

3 Drivers of global food prices Key demand drivers Population and income growth, especially in Asia Shifting diets: higher calorie intake Diverting food commodities for biofuel production Industrialisation of animal protein production Feedback loops Increasing speculation and hoarding Increasing trade protectionism Rising correlation with oil prices Input costs Uncertainties Price of food Severe weather events / climate change Challenges around food supply Broad base weakness of USD Key supply drivers Further productivity improvements Availability of additional land Availability of water Diverting crop production for biofuels Infrastructure bottle-necks 3 Food & Agribusiness Research and Advisory

4 Setting the scene Drivers of dairy consumption Promotion Population growth Shifting diets Income growth Urbanisation 4 Food & Agribusiness Research and Advisory

5 The emerging middle class the real driver Rapid growth in an (urban) middle class with increased spending power Households with incomes greater than USD20,000 pa (millions of households) 5

6 % GDP growth Global economy dusts itself off from GFC Two speed recovery; with growth above long-term average Advanced economies Emerging and developing economies World 20 yr ave 6 Food & Agribusiness Research and Advisory

7 Short-term macro headwinds Volatile equity Weighing on confidence and sentiment Global financial markets are highly volatile 7

8 Australia s currency challenge Have we moved to a new level because of the commodity boom? 8 Food & Agribusiness Research and Advisory

9 Topic 1 Topic 2 Topic 3 Future drivers and trends in dairy and food markets Where is the dairy sector at? Future prospects for Australia s dairy sector 9

10 An evolving role in world markets On the back of a declining milk pool 2010/11 finished at 9.1bn litres; up 1% on last year Milk pool is still 2bn litres below record levels 2011/12 expected to grow 2%; reaching 9.3bn litres Role in world markets is evolving and being challenged 10

11 bn litres Two different markets Spilt between domestic and export 7,000 Utilisation of milk by state 2009/10 6,000 5,000 4,000 3,000 Export Domestic 2,000 1,000 0 Vic Tas WA SA Qld NSW 11

12 A mature domestic market Growth underpinned by an expanding population / / / / / / / / /10 Milk Cheese Butter/blends Yogurt 12

13 On track for a return to growth With better seasonal and market conditions Positive price signals Water for irrigation Soil moisture Feed grain supplies Positive seasonal outlook Murray Goulburn farmgate pricing

14 Production costs are edging higher And will squeeze margins Total costs for average Tasmanian farm in 2010 Imputed labour 8% Depreciation 5% Hired labor 7% Fertiliser 9% Fertiliser prices edging higher Feed prices underpinned by strong export demand Other cash costs 39% Fodder 18% Delayed interest rate rise Source ABARE Interest paid 14% 14

15 Farmer confidence has improved Supported by better returns and good seasonal conditions 100% Dairy Confidence 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% % of dairy farmers expecting the rural economy to improve in the next 12 months less the % who expect it to worsen Source: Rabobank 15

16 Topic 1 Topic 2 Topic 3 Future drivers and trends in dairy and food markets Where is the dairy sector at? Future prospects for Australia s dairy sector 16

17 Australia s dairy sector is globally competitive Despite the difficulties faced Farm sector Good agricultural land Low cost production model Market responsive farmers Processing sector Refined export strategies Strong export culture Established trade links Geographical well-placed 17 Food & Agribusiness Research and Advisory

18 Fast growing but competitive global market The world market needs more supply World dairy market returning to an annual growth rate of 2.5% Demand growth not driven by the West The giants dominate forecast demand growth Growth in the Western world is mainly about value growth: Product innovations targeting health and wellness Convenience, snacking 18 Food & Agribusiness Research and Advisory

19 Will Australia capitalise on opportunities? Some hurdles to overcome Market volatility ripple effect along supply chain Good planning is vital Tight heifer/cow pipeline Export markets provide cash flow/diversification Labour is an issue And arguably unique to Australia s dairy sector Low appetite for capital investment Focus on sustaining profitability, rather than production growth Competitive access to markets with strong demand Australia needs to keep up 19 Food & Agribusiness Research and Advisory

20 Market access is a critical issue These days its about maintaining competitiveness New Zealand reached the finishing line first for China Australian agreement under negotiation since 2005 NZ in play since 2008 Delivers significant dairy concessions The race is on for India Agreements under negotiation Large opportunities for both countries The push for others GCC, Russia and Korea 20 Food & Agribusiness Research and Advisory

21 Structural shift to the dairy commodity market Underpins elevated trading range for commodity prices over medium-term Long-term demand fundamentals in tack Improving demand Lower buffer stocks Removal of intervention stocks WMP historic and medium-term target Higher costs of production Encouraging supply is expensive Increasing role of imports in swing markets i.e. India and Brazil Ability for reformulation Higher substitute prices 21 Food & Agribusiness Research and Advisory

22 Concluding remarks Underlying long-term trends for dairy consumption remain positive Provides room for growth to Australia s dairy sector Supply gaps need to be filled A structural change has occurred in most agri-commodity markets Dairy commodity market to trade at elevated levels Manifest along supply chain to higher farmgate prices Very positive prospect for Australia s dairy sector But with some obstacles But will be a rollercoaster ride Markets will exhibit ongoing volatility and complexity Stay informed 22 Food & Agribusiness Research and Advisory

23 Food & Agribusiness Research and Advisory A global team of dairy analysts supporting knowledge based banking 14 dairy analysts With cross sector support from team covering: Grains Farm inputs Animal protein Retail Beverages Fresno Mexico City New York Utrecht Mumbai Shanghai Sao Paulo Buenos Aires Melbourne Christchurch 23

24 Contact details Michael Harvey Senior Analyst Food & Agribusiness Research and Advisory The financial link in the global food chain DISCLAIMER Professional advice is recommended for all financial and strategic decisions. However, this information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any such decisions. This information is general in nature only and does not take into account an individual s personal circumstances. No representation is made that any forecast or projected information is correct or will eventuate and past performance is not indicative of future performance. Although reasonable efforts have been taken to ensure the accuracy of the contents of this publication, no warranty is given in regard to the total completeness and accuracy of the printed contents. The persons involved in the preparation and distribution of this information and their related persons disclaim all liability for any direct, indirect, consequential or other loss or damage suffered due to any use of or reliance on the information. 24