1. Hayley Moynihan Food & Agribusiness Research and Advisory Rabobank 8 July 2013 Winning through the supply chain Red Meat Sector Conference

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3. 3 Looking in the mirror Supply chain dynamics Looking forward

4. 4 The industry has been here before…. Source: Rabobank, 2013 Quotes over the past 20+ years...... “ By the end of this year three year term, I’m determined to see a meat industry that knows where it’s going.” Minister of Agriculture, 1991 “Competition may force meat plants to close” – 1997 “Meat industry failures tipped” – 1997 “A year of promise that didn’t deliver” – 2008 “Lamb kill in nosedive” – 2010 “Call for consolidation in industry with too much capacity” – 2012 “Riding the rollercoaster of returns” – 2013

5. 5 Sheep flock has been in a constant decline Source: Beef and Lamb NZ, Rabobank, 2013 Likely to get below 30 million head for the first time in over 50 years…… Over 30 years 35 million head less (down 50%), but processing capacity not adjusted to the same extent

6. 6 Viability within the sector falling Source: Rabobank, 2013 Particularly in relation to dairy

7. 7 Margin volatility drives prices Source: NZ Agrifax, Statistics NZ, Rabobank, 2013 Volatility in returns unprecedented – market signals distorted by procurement pricing

8. 8 Pressuring margins for processors too Source: Annual reports, 2013 Small or negative margins across the supply chain

9. 9 Déjà vu – supply chain tough to manageLooking in the mirror Supply chain dynamics Looking forward

10. 10 Global food and agri markets have changed Source: Rabobank, 2013 Red meat sector needs to evolve too, with greater coordination

11. 11 The ultimate dilemma for both parties Source: Rabobank, 2013 Which risks can you afford to live with and which can be managed? Sellers’ dilemma Buyers’ dilemma Need to manage higher prices and volatility Need to secure supply of agri commodities How much margin or certainty to offer suppliers? Will returns be better if I play the open market? Why commit to a buyer?

12. 12 Drivers of change will vary for everyone Source: Rabobank, 2013 Chasing value, rather than price, is the common feature but with different motivators Reduce exposure to market price volatility Improve resilience to market shocks Reduce risk Optimise production Improve process innovation Optimise resource flows and valorise waste flows Improve productivity Improve investment opportunities Access new models that provide leverage from chain partners Improve access to capital Improve product innovation Access new markets Work on other product attributes, such as quality and sustainability Enhance brand and reputation

13. 13 Example: UK dairy industry Focus on price may come at the expense of efficient supply chains Over the last decade; production down 8%, farm numbers down 44% (10,000), average herd size doubled Initial strategy to drive costs out of the business due to price pressure and industry shrinking Processors have since consolidated, been acquired by multinational brand players and diversified their product range New processing capacity and lower milk supply resulted in procurement competition heating up “Voluntary code of best practice on contracts”

14. 14 Example - MSA program Australia Source: MLA’s NLRS Rabobank, 2013 Premiums obtained in all segments across the supply chain MSA is a beef and sheepmeat eating quality programme Designed to assure buying, eating and cooking quality for consumers Extensive research involving farm practices, processing, cuts, ageing periods and cooking methods MSA requires standards to be maintained from paddock to plate

15. 15 Déjà vu – supply chain tough to manage Adding value rather than chasing price Looking in the mirror Supply chain dynamics Looking forward

16. 16 Status quo + less scale = unsustainable Source: Rabobank, 2013 But increases the necessity for addressing overcapacity - larger scale operators feel heat first * based on extrapolation of quota allocations in each year

17. 17 Key considerations for the meat sector Source: Rabobank, 2013 Which risks can you afford to live with and which can be managed? Farmers’ dilemma Processors’ dilemma Need to manage efficiency, higher prices and volatility Need to secure share of limited supply How much margin or certainty to offer suppliers? Will returns be better if I play the open market? Why commit to a processor? Should I invest further capital in the supply chain?

18. 18 A different path needs to be trodden carefully Supply chain behaviour needs to align with ambition The red meat sector fundamentally has a positive market outlook BUT a shrinking industry is the greatest risk and reduces options The status quo is not sustainable for all participants – efficiencies lost will hinder competitiveness Change is needed – but must be based on greater value for consumers and a more efficient supply chain Change also carries risks in execution; transactional costs and maintaining market share Capital will be needed to support restructuring of the supply chain Supply chain relationships and commitment will be key to extracting value

19. 19 Déjà vu – supply chain tough to manage Adding value rather than chasing price Change is inevitable - scale needed for success Looking in the mirror Supply chain dynamics Looking forward

20. 20 Rabobank contact details Rabobank International Hayley Moynihan Food & Agribusiness Research and Advisory t. +64 3 341 4218 e. hayley.moynihan@rabobank.comayley.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 “The financial link in the global food chain”™ Food & Agribusiness Research and Advisory