Dairy market report18th February 2015

Updated for latest GDT and EU market developments

GREEN SHOOTSExecutive Summary

• Output moderating in NZ and EU though still rising in US

• GDT recent positive results reflect lower NZ production and lower volumes being put forward by Fonterra

• Chinese demand picking up. Strong lift in NZ WMP sales to China in last two months

• EU average dairy prices firming slightly, reflecting very strong exports in 2014, boosted recently by weak Euro and strong US$

• Extension to APS to end Sept 2015 (from Feb 15) increases market support for EU SMP and butter

• China may already be back, Russia still out, but more affordable products mean demand from Africa, Mid East, SE Asia. 2014 EU exports well up on 2013.

• Market prices still weak, but have no started to recover

• Negative side: low oil prices good for energy costs, but bad for demand from oil producing countries. Also, uncertainty re. EU supplies post 31st March.

Global milk output (a)

• EU output easing due to superlevy pressures and cold weather. Also poorer profitability, culling of marginal cows, less feeding.• UK – poor prices and margins due to weak markets, distress

milk and strong Sterling. More moderate growth of 3% y-o-y early Jan

• US output still rising despite recent dairy price collapse. Large number of farmers (50%) have locked in margin, so no impact on output. USDA forecast continued growth of 3.3% for 2015.

• NZ output growing more moderately due to drought, lower profitability and less concentrate feeding. Fonterra forecasts 14/15 output to be 3.3% less than 13/14 in MS, which is over 10% in volume. North Island output down 1%, drought declared officially by Govt.

Global milk output (b)

• Ireland -17.1% in

Dec;

• +4.2% for

Jan-Dec 2014

• End Dec supplies

5.93% over quota

Global milk output (1)

Source: CLAL

Global milk output (1a)

Source: EU MMO

Global milk output (2)

New Zealand: +2.8% for Nov 2014+4.3% for Jun to Nov 2014Forecast for 14/15 = -3.3% v 13/14

US: +3.1% for Dec 2014+2.37% for Jan to Dec 2014Forecast for 2015: +3.3%

Source: DairyCo UK

Global milk output (3)

Argentina: -8.7% in November 14- 4.3% down Jun-Nov

Australia: -1.6% in December 14+2.62% for Jul-Dec 14 period

Source: DairyCo UK

Global milk output

China’s milk production rising Imports of liquid milk (raw and packaged) is rising faster.

Source: CLAL

Gross milk output (5)

Brazil has been growing its production massivelyfor the last number of years, though nowhere near self sufficient

Source: CLAL

Dairy prices

• Some slight firming in Europe, including in spot milk prices

• Returns from EU average prices up nearly 1c/l in last 2 weeks to 25th Jan

• GDT• 3rd/4th consecutive positive results overall

• 6th for butterfat prices

• 4th for powders

• Lower quantities offered, reflecting lower supplies expected

• US price collapse from Sept to end 14 – some very slight uplift for butter and cheese in early 15

Dairy prices: EU

EUSMP/butter gross return = 31.90c/l before processing

costs

IRELANDSMP/butter gross return = 29.93c/l before processing

costs

Source: EU MMO

Dairy prices: EU

Based on EU MMO

Since Jan 1st:Butter +€130/tSMP +€210/tWMP +€150/tCheddar +€120/tWhey pdr +€ 80/t

Dairy prices and returns - EU

EU gross returns 34.05c/l before processing costs

2.23c/l up in last 4 weeksBased on EU MMO

8th February 2015

Calculations 13/02/15

Avg EU mkt price

at 08/02/15 - €/t

Trend

re

prev

wk c/l equiv

Estimated

coeff.

BUTTER 3040

SMP 2050 31.90 35% 11.17

CHEESE 3250

WHEY PWDR 950 39.17 41% 16.06

WMP 2510 31.13 8% 2.49

OTHER* 27.12 16% 4.34

34.05

ASSUMING THAT "OTHER" RETURNS 15% LESS THAN SMP/BUTTER

ESTIMATE OF RETURNS FOR REPRESENTATIVE IRISH PRODUCT MIX

EU spot milk prices

Source: EU MMO

International dairy quotes (09/02/15) in US$

Source: EU MMO, USDA

Source: EU MMO – updated to 9th Feb 2015

Dairy prices – GDT 17/02 (1)

Source: GDT

Dairy prices – GDT 17/02 (2)

Gross returns €c/l

GDT 17th Feb EU avg 8th Feb

SMP/BUTTER 36.09c/l 31.90 c/l

WMP 35.61c/l 31.13 c/l

Based on: GDT & EU MMO data

A bit more info on GDT – who sells through it and what do they sell? (1)

IndiaSells SMP and WMP

Co-op owned by Danish, Swedish and German farmersSells BMP and SMP

Mostly Danish, largest wheyand lactose supplier in the worldSells lactose

USSells unsalted butter, lacticand sweet creamalso SMP

Source: GDT

A bit more info on GDT – who sells through it and what do they sell? (2)

USSells SMP

NZSells AMF, SMP,Cheddar, Ren Cas,WMP, butter saltedand unsalted, BMP

AustraliaSells lactose

FranceSubsidiary ofSodiaalSells SMP

GermanySells SWP (sweet wheypowder)

Source: GDT

Dairy prices: USDA (1)

Source: USDA

Dairy prices USDA (2)

Source: USDA

Market developments (1)

• Latest Chinese stats suggest they are back buying• WMP – strong increases in imports especially from NZ in last two

months• SMP – trend less strong, excess stock still on hand• IMF – stable ongoing import demand, Irl and NL featuring much

more in recent months

• Main markets for SMP • South East Asia – this is where most of the NZ product goes• Price sensitive

• Exchange rates a major factor in making EU exports competitive, and helping EU prices lift• Weak Euro further weakened v. US$ and GB£ by announcement

of QE and outcome of Greek election• Strengthening US $ reflecting stronger economy

• Lower oil prices affecting buying power of oil producing countries

Market developments (Chinese buyers back !)

Source: Dairy Markets

Exchange rates

Euro has weakened 9% against Stg in the last year3.6% in the last month alone (some pick up in recent days)

Euro has weakened 16.2% against US$ in the last year5.6% in the last month alone (some pick up in recent days)

Milk prices

• Milk prices have fallen globally

• Challenges to profitability will/are helping to tame output, more in EU/NZ than in US

• EU milk prices down 15.5% between Jan 14 and Nov 14 – from €40.35/100kgs to €34.10/100kgs (LTO)

• NZ milk prices down 42% season on season (based on current forecast payout for 2014/15, which may change)

• US Class III (cheese milk) prices down over 27% since peak in Sept 14 – but many farmers have hedged.

Compared international milk prices

Source: EU MMO

EU milk prices

Source: EU MMO

Milk prices - EU

Source: LTO

Milk prices - EU

Source: EU MMO

EU milk prices v SMP/butter equivalent

Milk prices - US

27.5% fall

Source: USDA, WASDE

Milk prices - NZ

• 2013/14 final Fonterra payout:• Milk price = NZ$ 8.65 per kg MS (February 2014)

• Dividend = NZ$ 0.10

• Total payout = NZ$ 8.75

• Current 2014/15 forecast payout:• Milk price = NZ$ 4.70 per kg MS (10th December forecast)

• Dividend = NZ$ 0.25 to 0.35

• Total payout = NZ$ 4.95 to 5.05

• Drop by 42-43%

Irish milk prices

Irish milk prices down nearly 8c/l (21%)VAT refund on Dec price, paid in Jan, should addapprox 0.06c/l to current VAT incl. milk prices.Not all co-ops have passed this back, check your milk statement!

Average December price incl.

VAT = 30.73c/l

Irish milk prices – IDB Index

93.0 points = 27.25c/l + VAT = 28.66c/l incl VATSource: IDB

Irish milk price

Based on IDB & FJ Milk League

Outlook for milk prices?

• Though recovery appears genuinely underway, current returns remain weak.• IDB equivalent is 28.66c/l incl. VAT• EU average gross returns (before proc. costs) are 32-33c/l• Price paid by co-ops average 30.73c/l incl VAT (Dec 2014)• GDT (17th Feb) SMP/butter equivalent is: 36.09c/l ; WMP is 35.61c/l; Irish

equivalent product mix around 32c/l (due to GDT Cheddar prices< than EU Cheddar prices)

• UK developments? • Distress milk (farmers who played the market when at peak, now without

a home) is keeping milk prices down except for those directly contracted to retailers for liquid milk

• Impact on cheese market – cheap milk available, causing pressure

• Likelihood of further milk price reductions?• Though returns are still low, they are now rising. Change in market

sentiment and dairy price directions will make it less likely. Glanbia and Aurivo announced price maintenance for Jan. Glanbia for Feb-Mar.

• EU supply growth after 31st March? Continued US supply growth? Demand developments from China? End of Russian ban?