Global dairy markets darkness before dawn Dairy NZ

Global dairy markets - darkness before dawn Dairy. NZ Farmer Forums Hayley Moynihan Rabobank Food & Agribusiness Research April 2015

Food & Agribusiness Research and Advisory Rabobank’s world leading research network Over 80 research professionals across 18 offices globally - 14 focused on dairy. Entire product chain from farm inputs and primary production to processors and consumers covered

The big drivers Factors beyond our control. . . .

Slow economic growth, maturity and high prices ensured weak consumption growth in 2014 Estimated dairy consumption growth in 2014 v 2013 (change in LME) EU +1. 6% Russia – 3. 3% USA +0. 3% China +1. 0% Combined growth in these markets of 0. 6% Source: Rabobank estimates

China – the surplus is still clearing. . . September 2013 January 2015 Empty shelves for low-end milk in Beijing’s Hualian Supermarket. Source: People’s Daily (citing Jinghua Times) Farmers dump milk in a field near Weifang city, Shandong Source: Forbes Asia

. . . and market adjustment likely 2 1 Let Chinese milk prices fall and push out small farmers 3 Let China milk prices fall but increase subsidies to dairy farmers Maintain milk prices but processors elect to pick up less local milk Adjustment borne by Chinese farmers 4 Restrain imports § Some combination of all four options is likely § Exporters should prepare for a sharp reduction in Chinese imports… § …and regulatory ‘shenanigans’ § We will find out the true value of partnerships with Chinese buyers Adjustment borne by exporters

EU: the future has come to pass We expected the removal of quotas to generate additional supply growth to 2020 2015: low prices, quota penalties, tough comparable figures Beyond 2015: § Milk producers in many regions are now hitting other constraints § Likely leaving far less growth over the next five years as a result Exceptional milk prices through 2014 brought much of that growth forward

US production keeps on trucking

Farm gate prices tumble

Suppliers to hit the brakes, slowly

The way forward Medium-term prospects remain solid, but not spectacular

Import demand growing, but slowly

The cost conundrum continues, compounded by FX changes Source: Rabobank, 2015

Finding the market equilibrium level We are back in the green zone THE RED ZONE THE GREEN ZONE Source: GTIS, USDA, Rabobank analysis

Higher prices more sustainable by late 2015/early 2016

Implications at the farm gate § 2014/15 is further evidence of the market volatility expected to continue in global dairy markets § The price recovery is likely to be more prolonged than seen in 2009/10 and in 2012/13 § A greater number of variables now impact farm enterprises § Farm business resilience and maintaining competitiveness will determine ongoing success § Milk prices will rise again, but it will be important to manage what you can influence

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Rabobank contact details Rabobank International Hayley Moynihan Director of Dairy Research, New Zealand Asia “The financial link in the global food chain”™ Food & Agribusiness Research and Advisory t. +64 3 961 2907 e. hayley. moynihan@rabobank. com DISCLAIMER This document is issued by Rabobank New Zealand Limited incorporated in New Zealand (“Rabobank”). The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by Rabobank or any of its affiliates to enter into a transaction. 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 financial or strategic decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither Rabobank, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any direct, indirect, consequential or other loss or damage howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of Rabobank. All copyrights, including those within the meaning of the Copyright Act 1968 (Cth), are reserved. New Zealand law shall apply. By accepting this document you agree to be bound by the foregoing restrictions. © Rabobank New Zealand Limited, Level 23 157 Lambton Quay, Wellington NI 6011 New Zealand, +64 4 819 2700 Food & Agribusiness Research and Advisory