Presentation to Oireachtas Joint Committee on Agriculture, Food and the Marine

Joe Collins – MD Ornua Dairy Trading & IngredientsAnne Randles – Company Secretary

24th November 2015

2

Content

• Volatility – Definition– Frequency and magnitude– What’s driving it from a dairy perspective

• Irish milk seasonal output and farming lead/lag compounding factors

• Ornua approach to managing volatility

• Ornua Purchase Price Index (PPI)

• Market situation report & outlook

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Volatility defined ………….

• Volatility is a term given to frequent, significant and unpredictable fluctuations in a commodity's value– But volatility is a normal feature of commodity markets

• Mainly caused by mismatches in supply and demand, which can occur for many reasons.

• Understanding and managing volatility and associated risks is essential for businesses in the dairy sector

• For dairy products, minor changes in supply and demand can have major impacts on price due to lead and lag in supply chain

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Volatility increasing ……..

Dec-90

Nov-91

Oct-92

Sep-93

Aug-94Jul-9

5

Jun-96

May-97

Apr-98

Mar-99

Feb-00

Jan-01

Dec-01

Nov-02

Oct-03

Sep-04

Aug-05Jul-0

6

Jun-07

May-08

Apr-09

Mar-10

Feb-11

Jan-12

Dec-12

Nov-13

Oct-14

20.00

25.00

30.00

35.00

40.00

45.00

Irish Milk Prices 1990-2015

4

Max move: +/-10cpl

Max move: +/-24cpl

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Why is Dairy Volatility increasing ………….

• EU Dairy has moved from regulated market to free market

• Weather shocks - impact – As global demand grows, areas more vulnerable to weather shocks are being used to produce

milk• Trade policies impacting demand

– Russia’s ban on EU food imports vs free trade agreement

• Stock policies impacting on price movements

• Data availability and speed

• Hedge funds, dairy auctions and futures

Irish Milk: Seasonal, Grass-based system compounds Volatility risks

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0%

2%

4%

6%

8%

10%

12%

14%

16%

Milk Output Profile

EU-28 IRELAND

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How can Ornua help insulate farmers against volatility

• Grow brands – Kerrygold , Pilgrims Choice , Dubliner etc

• Develop value-added, differentiated ingredients

• Diversify markets & sectors

• Strengthen supply chain partnerships

• Fixed Price Milk Schemes

• Trading expertise focus, contract & stock management

Ornua PPI 2015 ytd – 10 point swing

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec80

85

90

95

100

105

110

93.0

97.5

100.0

98.9 98.5

95.3

91.891.2

90.1

Base

: 201

0 =

100

The Ornua Purchase Price Index (2010 = 100)

Extra milk (from 2014) has depressed prices

9

Jan-12

Mar-12

May-12Jul-1

2

Sep-12

Nov-12

Jan-13

Mar-13

May-13Jul-1

3

Sep-13

Nov-13

Jan-14

Mar-14

May-14Jul-1

4

Sep-14

Nov-14

Jan-15

Mar-15

May-15Jul-1

5

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

NZAUSTRALIAUSEU-28

Global Milk Production - Key Exporting Regions - yoy change in milk produc-tion

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Dairy Market: Weakness returning after brief upturn

7 Jan 2014

4 Feb 2014

4 Mar 2

014

1 Apr 2014

6 May 2014

3 Jun 2014

1 Jul 2

014

5 Aug 2014

2 Sep 2014

1 Oct

2014

4 Nov 2014

2 Dec 2014

6 Jan 2015

3 Feb 2015

3 Mar 2

015

1 Apr 2015

5 May 2015

2 Jun 2015

1 Jul 2

015

4 Aug 2015

1 Sep 2015

6 Oct

2015

3 Nov 2015$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

GDT WMP Prices ($/mt)

August 4th : Low Point

October 6th: Recovery Peaks; Prices begin to weaken again

Recent signs of an output slowdown in NZ have improved sentiment…but further stabilisation required

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New Zealand: Early season supplies showing decreases; forecast for more substantial declines as season progresses (Fonterra estimating 5%+ decline)

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013/2014 2014/2015 2015/2016 Forecast

EU milk output is very strong (post quota)

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+1.3 est.

Exports have been hindered by events in Russia

13

2013 2014 2015 0

50,000

100,000

150,000

200,000

250,000

EU Exports to Russia; Jan-Aug

Cheese Whey etc Fermented ProductsButterfat Milk Powders

Tonn

es

And China…

14

2010 2011 2012 2013 2014 2015 0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

China Imports; YTD Sept.

WMP SMP

China stocks still weighing on market

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Source: Dairy NTEL

EU export performance has been good, considering the difficult market environment

16Presentation Title

2010 2011 2012 2013 2014 2015 200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,0002,200,0002,400,000

EU exports to Sept (tonnes)

Powders Cheese Whey etc.Butterfat Fermented Products

Demand for Dairy Fat is Increasing in US & EU

• EU Butter consumption up 3.7% in 2014, compared to annual average increases of 0.8% for 2004-2014

• EU Cheese consumption up 1.6% in 2014, compared to annual average increases of 1.1% for 2004-2014

• US Butter sales up 14% in 2014; Sales of whole milk up 11%, with Skim milk down 14%

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Market Outlook

• In the absence of a rapid (weather-related) supply-correction, the coming months will be difficult for dairy farmers– some commentators forecasting weak prices out to H2 2016

• Market still digesting 2014 supply-overshoot and demand shocks

• Demand (+c.1.5%) will eventually catch-up with supply growth (+c.1.25%) & stocks: Question is when?

• Current (below cost of production ) prices are not sustainable for farmers or processors– Milk price recovery may lag recovery in product prices

• Long term, future is positive; – Fundamentals remain in place; world populations are growing, getting wealthier, and

becoming more positively disposed towards dairy fat and protein– Ireland has a competitive edge in milk production

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In conclusion

• Volatility is increasing• Only the strongest in the supply chain and those that adapt will succeed• For farmers, the best insulator against volatility is a combination of:

– Open market returns– Fixed milk pricing schemes– Hedging on a relevant financial exchange when liquidity allows– Efficient and shrewd financial planning (in those key times of plenty)

For its part, Ornua’s volatility management mechanisms ensure its own product prices (as evidenced by the PPI) trade in a narrower, less volatile range than the market highs and lows

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Thank You