1. New realities of the dairy market
Steve Spencer
Freshagenda

2. What we do Track world market in milk Simulate future dairy trade
Market surplus/shortage
Product values
Translate impacts on suppliers, traders, buyers
Forecast value of products, milk
But also
Study trends across food
Analyse supply chain conditions
Published analysis of food pricing

3. Realities Some that are not news No immunity from global forces
We can’t influence global situation
You’re on a rollercoaster
Domestic market is a tough landscape
“Value-adding” is elusive
New?
Structure of global supply
Low value of oil
We’re in a slow recovery

4. Theme park ride

5. The global market
Who buys
Who supplies (2015)
Product mix

6. Milk use
Exposed to trade
Exports

7. The grocery playing field

8. How we got here? EU slowed to avoid fines EU slowing, NZ down
EU sped up output
China’s bubble deflating
Russian embargo

9. How we got here?
Quota + grass

10. How we got here?

11. The market for milk What HASN’T changed Global market sets value
Weather drives volatility
Geopolitical stuff happens
Limited transparency
China’s buying bubble
Oil, feed, milk track closely
Long-term demand is sound (…but…)
What HAS changed
EU is unshackled
Oil is cheap
Russia is closed
Faith in the Chinese miracle
Power of BRICs

12. Outlook: Highlights Fundamentals: bottom of the cycle
Slow firming in prices expected in 2016, improving stronger in 2017
Large stocks overhang the market
Powders (EU), Cheese (US)
Several risks remain
Sustained growth in EU?
How will intervention be used?
US now expanding – adding to cheese stocks
Weak demand-side growth

13. EU unshackled Growth sustained longer Will add 13bl (2013 to 2016)
Country level variation
Milk prices tumbling, but…milk growing (at least) to Q3-2016
Growth milk into SMP
Intervention going to 500Kt
Milk +5.8bn, Stocks (5.6bn)
When does it come back?
Alters milk use for 3-4 years
Weather and feed prices critical

14. NZ supply 2016/17 output is a crucial variable Far more resilient
3 years at <NZ$5.00/kgms?
Weather will drive result
Debt, fertility, supplements
Culls not increasing … yet
Expecting 3% less milk in 16/17
Longer impacts?
Investor confidence?
Retreat to lower cost systems?
Cap on output?

15. US market A glut getting worse Growth steadily improving
Mostly about feed quality
Demand not keeping up
Cheese is flying off shelves
Milk sales, exports weak
Pressure on cheese prices
Milk growing into 2017

16. Low oil: good or bad? Impact of “low oil” on dairy prices
Pros (stronger prices)
Cons (weaker prices)
Demand
Better affordability for oil importers?
Lower fuel prices in developed regions – more cash for eating out?
Oil exporters have weaker demand economies
Weaker economic activity, slows growth
Supply ?
Weakens biofuel demand = lower feed costs
Lower fertiliser costs

17. Oil, feed, milk powder

18. The China bubble

19. China Good and bad Smaller powder market Return to 2012 for WMP
Cheese (fast food), IMF strong (pref for EU brands)

20. Price sensitive buyers

21. Price sensitive buyers

22. Price sensitive buyers

23. What does it mean for you….

24. Our approach Historical dairy production and trade 10 major exporters
(10 exporters into all regions)
10 major exporters
Milk output growth
Product mix
Domestic demand
Import demand growth?
Dairy Trade Simulator
Export availability
Projected short-term trade balance
Products
Milk equivalents
Market tension index
(SMP and WMP)
Stocks
Impact on projected Commodity values
Milk price outlook

25. Milk value $4.10/kgms $4.80-$5.20/kgms Outlook for trade Product mix
Expected commodity values
Product mix
Conversion costs
Commodity milk value
$4.10/kgms
Capacity to add higher value
$4.80-$5.20/kgms
Projected 2016/17 full year price range

26. Milk value $4.80-$5.20/kgms $4.50 - $4.75/kgms Outlook for trade
Expected commodity values
Product mix
Conversion costs
Prices rise slowly over H2-2016, faster in early 2017
Lagged translation of spot into achieved prices
Dollar weakens slightly
Commodity milk value
Better execution
Assume returns to FY15 level
Capacity to add higher value
$4.80-$5.20/kgms
Projected 2016/17 full year price range
Opening price range
$ $4.75/kgms

27. Milk value – following year
Outlook for trade
Expected commodity values
Product mix
Conversion costs
Commodity milk value
Capacity to add higher value
$ $6.30/kgms
Projected 2017/18 price range

28. Is the dairy game stuffed?

29. Australia – medium term
Likely to shrink - 3 years back to 2014/15 volumes
Little chance of spur to sustained growth
Domestic shares will continue to creep higher
Increasing diversity of business models and specialisations
Further consolidation?
Proposition: agile, tailored, niche
Don’t forget:
A strong co-op is critical to capture and pass returns to farmers

30. The long term
After 2017
Market keeps growing at 4.4% (last 6 years at close to 5%)
Developing markets slow from current rates
EU and NZ expand export capacity by largest volumes
Notional gap = 5.4bn litres
Key supply side assumptions
EU grows at 2% slowing to 1%
NZ grows at 3%, slowing to 2%
US grows at 1.5% (steadiest)

31. The long term A lot can go wrong? What does it mean?
Outlook still finely balanced
Most sensitive to EU growth rate after quota shake-out
US longer-term risk
China still a significant variable
What does it mean?
Upward trajectory for prices, but remaining volatile!

32. For farmers, the challenge remains
Are they up for the rollercoaster?
Volatility is assured?
Beware of the “value-add” cordial
What’s the destination outcome?
Is the business capacity OK?
Yield, cost structures, margins
Can they manage the lows and harvest the highs?

33. Thank you