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Production / Consumption / Trade
Dairy Business – 2014
Kevin Bellamy -Senior Dairy Analyst
Kyiv – Ukraine 27 Nov
The world dairy industry
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Food and Agribusiness Research and Advisory Rabobank’s world leading research network
Over 80 research professionals across 18 offices globally - 14 focused on dairy.
Global demand still expected to outstrip supply in the medium term
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Population growth Urbanisation
Higher disposable incomes Globalisation
Global growth >2% CAGR per year for
dairy
Rabobank expects self sufficiency in demand regions to struggle
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Projections of changes in self-sufficiency to 2020
Source: Rabobank analysis
+3.1 Billion
+1.9 Billion
+0.1 Billion
+2.5 Billion
+3.5 Billion +3 Billion
+0.5 Billion
+2.4 Billion
+4 Billion
+3.8 Billion
+1.2 Billion
Prices declined rapidly in Q3
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Dairy Commodity Exports Prices (f.o.b Oceania)
-
1,000
2,000
3,000
4,000
5,000
6,000
USD
/T
Cheese
WMP
SMP
Butter
Whey Powder
Commodity Export Prices (USD)
Source: USDA, Rabobank
Significant differences have emerged in international markets
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Whole Milk Powder quotations – EU / US / NZ
The difference was particularly large in butter
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Butter quotations – EU / US / NZ
Milk production growth has continued to rise strongly in export regions
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Big 7 exporters increased production by almost 4.3% in the three months to July
Half of the increase was generated by the EU alone, with strong support from Brazil and NZ
Milk Production Growth of the ‘Big 7’ Milk production growth - key export regions
EU production is 5.3% up YTD
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10000
10500
11000
11500
12000
12500
13000
13500
14000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2012 2013 2014
Milk Production – 000 tonnes
Exporters are pushing a wave of milk onto international markets
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The wave of export milk has peaked just as China left the market
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Imports rose 57% in first 7 months of the year
But Chinese milk production is growing again
And domestic demand has been very weak
Anecdotal evidence of stock accumulation
Forward purchasing by Chinese buyers on the international
market has been weak since April
Import buying could be 75% down YOY in 2H
Top 3 dairy processors half-yearly sales
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1H2006 2H2006 1H2007 2H2007 1H2008 2H2008 1H2009 2H2009 1H2010 2H2010 1H2011 2H2011 1H2012 2H2012 1H2013 2H2013 1H2014
Top 3 Chinese players sales value (YoY) Top 3 sales value adjusted for price change (YoY)
Top 3 sales adjusted for price impact from premiumization (YoY)
Sources: Company reports, China Statistics Bureau, Rabobank estimate
Adjusted for price increase and premiumization, volume is estimated to have slowed in 1H2014
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Russia then banned imports from key suppliers in August
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,0
,50
,100
,150
,200
,250
,300
,350
,400
00
0 M
T P
rod
uct
wei
gh
t
Russian Dairy Imports 2013
Source: GTIS & Rabobank Note: Only include HTS 04 categories Banned markets represented in orange
33%
14%
7% 5%
3%
38%
Russia United States Switzerland
Japan Saudi Arabia ROW
EU Cheese export destinations (787k tonnes in 2013)
Others have yet to take up the slack
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China and Russia being abscent from the market will slow recovery
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Farmgate milk prices are now falling
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Meeting even this NZ
price relies on the
market improving over
coming months
But
Farmgate milk prices remain very high in many regions
EU quotas are removed in April 2015
Feed costs have fallen significantly
The prices of key feed commodities has fallen, and look set to remain low
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A phenomenal crop CME Corn and Soy Price
(futures price as at 24th Sept 2015)
0
2
4
6
8
10
12
14
16
18
Jan
-10
May
-10
Sep
-10
Jan
-11
May
-11
Sep
-11
Jan
-12
May
-12
Sep
-12
Jan
-13
May
-13
Sep
-13
Jan
-14
May
-14
Sep
-14
Jan
-15
May
-15
Sep
-15
US
D/B
ush
el
Corn Soybeans Corn futures Soy futures
The slowdown in milk production growth will only occur gradually
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Export surpluses will thus continue to expand over our forecast period
Upside and downside dairy price risks exist
1. Russia may elect to remove the ban on dairy imports
2. Overestimation of China’s milk production recovery or underestimation of demand growth could mean stronger demand from China
1. EU supply growth after quota removal may be stronger than we are forecasting
2. Further strengthening of USD
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Upside Risk
Downside Risk
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But then after the dust settles, what will be the next stage and how will the horizon change?
The amount and types of products demanded will vary
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Demand asymmetric
Product mix will vary
High growth Infant Milk formula
Nutritional food and beverages Hybrid beverages (juice/dairy)
Substitute products Healthier variants of traditional products
Moderate growth Yoghurt
Cheese (food service)
Slow growth Cheese (retail)
Fluid milk Butter
Source: Rabobank Analysis
79%
21%
Net investment volume
Powder
Cheese
• Our estimates suggest investment could lead to 1m tonnes of powder and 300k tonnes of cheese capacity added within Europe since 2012/13 (Gross investments)
• Based on publically available information not including fresh products
Source: Rabobank Analysis
Source: Rabobank Analysis
Processing investments following the expected milk increases
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Milk production growth concentrating in north and west
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Regional milk production fields
Milk production share 2012
The growth coming from north and west
Change in milk output (€ per hectare) 2012 v 2003
<0.5%
0.5%-0.7%
0.7%-1%
1%-1.5%
>1.5%
Change in output (€ per hectare) 2012 v 2003
20 to 50
50 to 100
over 100
less than 0
0 to 20
Sources: Eurostat, FADN and Rabobank analysis
EU needs further consolidation
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-200000
0
200000
400000
600000
800000
1000000
1200000
0 50 100 150 200 250 300 350 400 450 500
Pro
du
cer
Nu
mb
ers
Herd Size
Bubble equals milk solds per farm
New Zealand
EU
US Australia
Although the difference within Europe varies considerably
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-20000
0
20000
40000
60000
80000
100000
120000
140000
160000
- ,20 ,40 ,60 ,80 ,100 ,120 ,140 ,160 ,180
Pro
du
cer
nu
mb
ers
Herd size
Bubble is milk solids per farm
UK Netherlands
Denmark
Austria
France Germany
Finland
Spain Ireland
Italy
Investment fund interest building providing other capital sources
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Foreign investors get a taste for dairy industry 20 September 2014
AUSTRALIA’S $4 billion dairy industry is the new flavour of the month among foreign investors, with global pension funds, food companies and wealthy individuals turning their focus from New Zealand’s fertile dairy plains towards Victoria and Tasmania. At the same time, the local dairy industry is starting to adapt to the idea of greater foreign investment as a positive step, in an industry hamstrung for the past decade by low milk prices, high debt levels, poor profits and falling milk production.
Chinese investment fund to tip billions into Australian farm projects 17 September 2014
Investors queueing for elusive dairy farms 18 August 2014
Dairy Australia director John McKillop
AP1 eyes increased exposure to NZ dairy fund ahead of close 28 August 2014
Key questions for players
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• How will tension to valorise member milk vs. Pressure to supply expanding customer demand play out?
• How will companies support members/suppliers in organically growing milk production in a highly concentrated region with increasing land costs, and high bio-security risks?
• How can companies help protect members/suppliers against continued price volatility?
• How will small land locked farms in Western Europe compete with consolidated farms from elsewhere in the world?
• As a result is there a way to attract more international investment to Ukraine in production and processing
Thank you for your attention
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“The financial link in the global
food chain”™
Kevin Bellamy Senior Dairy Analyst +31 6 12 559 004 [email protected]