Western Victoria Roadshow
Dairy 2009 – Situation & Outlook
Industry briefing
22 May 2008 (final)
1
Rough road to recovery
 Input prices remaining firm
 Water access uncertainty
 Improved rainfall in northern
regions
 Asset values under pressure




Sustained competition for milk
Choices in market/product mix
Capacity pressures in Nth Vic
Processing consolidation
 Cautious market recovery with
slow GDP growth
 Ongoing risk of volatility
 Restored EU/US intervention
 Trade reform complicated by
short-term protectionism
water
Inputs
Milk
production
Processing/
manufacturing
Marketing
supplements
Import
 Underlying confidence in demand
 Stalled investment due to financial
market turmoil
 Short-term cashflow crisis in south
 Uncertainty: climate & systems
Export
Dist’n
Retail
Food service
• Weakened consumer sentiment but
increased spending power
• Weakening food price inflation
• Consumers preferring cheaper food options
• More private label but QSR volumes boosted
• Wholesale prices under pressure from falling
2
commodity prices
Effect of the GFC on global dairy market
Economic climate
High risk exposures
for major banks
Tightened credit
markets
Recession in
developed
economies
Lower disposable
incomes in
developing world
Currency exchange
rate volatility
Supply
Demand
Supply response to
high 2008 dairy prices
Initial limits on
trade credit
Crop plantings harder to
fund in some countries
Firm grain/feed prices
due to crop limits
Consumers tradingdown dairy spend
Reduced demand
volumes
Buyer caution on
volume & price
Build-up in
dairy stocks
Unreliable
climates
Squeezed milk
production margins
EU/US
intervention
restored
Reduced product
prices
Reduced milk
supply expansion
Rebalancing of dairy markets
3
The world market
 Cautious market recovery with
slow GDP growth
 Ongoing risk of volatility
 Restored EU/US intervention
 Trade reform complicated by
short-term protectionism
water
Feed
production
Milk
production
Export
Processing/
manufacturing
Marketing
supplements
Import
Dist’n
Retail
Food service
4
Stabilising international prices
5
What’s driving world markets?
Supply
• Developing supply response
to lower prices
• Declining output in EU/US
• Feed prices remaining firm
• Market intervention restored
• EU subsidies
• EU resisting further support
• Low product stocks (except
cheese)
• Limited export availability
from emerging low cost
suppliers
• NZ supply continues to grow
Demand
• Weak demand growth in
developing markets
• Recession affecting important
markets
• Lower cheese demand in
Japan
• Lower butter and cheese for
Russia
• Buyer caution with weakened
demand
• Global economy near the
bottom
6
US & EU SMP stocks have reappeared
7
Impact of subsidies
subsidy
New world price
Exporter offer price
Prevailing world price
Clears domestic
market
•Support internal
prices
Exporters seek a
lower price
•Returns topped
up by subsidy
•Limits ability of
unsubsidised
prices to rise in
competition
8
Major exporter production
10%
2007
8%
2008
6%
2009
2%
0%
-10%
Brazil
Argentina
-8%
Aust
-6%
NZ
-4%
US
-2%
EU-27
% change
4%
World market outlook
Short term
• Short-term buyer caution
• Lack of transparency hinders
stability
• Multiple influences on
currency threaten returns
• Economic recovery in
developing countries is
crucial
• Supply response to low
prices
• Prices finding new levels
Medium term
• Increased sources of volatility
• Developing economies
underpin ongoing demand
growth
• Outlook: Supply lower than
demand growth
• Dairy maintains relativities
with substitutes
Risks
• Further intervention?
• More protectionism?
10
Long range global outlook
The domestic market
• Weakened consumer sentiment but spending
power boosted by better disposable incomes
• Weakening food price inflation
• Consumers looking for value food options
• More private label but QSR sales boosted
water
Feed
production
Milk
production
Export
Processing/
manufacturing
Marketing
supplements
Import
Dist’n
Retail
Food service
• Dairy sales proving resilient – good volume and value growth
• Wholesale prices under pressure from falling commodity prices
• Worsening economic conditions and rising unemployment
encourage more “trading down”
• Value threatened but volume to remain stable
12
Domestic market a bright spot
Supermarket growth by category
Yr to May 2009
0%
4%
8%
12%
16%
20%
Milk - Fresh
Volume
Milk - UHT
Value
Cheese cheddar
Cheese - Noncheddar
Butter
Dairy blends
13
“Trading down” becomes “economising”
Retail
• Milk
• From brand to private label
• Up from 2L to 3L
• From functional/modified to
whole
• Cheese
• Changing pack size
• Lower sales of premium lines
Eating out/convenience
• More meals at home
• But eating out still on the
agenda
• Moving from casual dining to
QSR
• Supporting cheese volumes
• Fewer impulse purchases
• Hurting flavoured milk
• Other
• Strong “value” push in retailer
promotion
• Faster sales growth by Aldi
14
Challenges from both sides




Sustained competition for milk
Choices in market/product mix
Capacity pressures in Nth Vic
Processing/marketing consolidation following NatFoods
merger with ACF
water
Feed
production
Milk
production
Export
Processing/
manufacturing
Marketing
supplements
Import
Dist’n
Retail
Food service
• Higher domestic share influencing milk value given
price disparities
• Lack of milk growth sustains pressure on capacity
• Lower throughput will drive regional capacity
restructuring
• Retailers driving supply chain cost reductions
15
Shifting market mix
•
•
Home market more important with more of the milk?
Respective market/product returns evaluated
Australian industry market mix
16
Farmgate market
Average export returns and Murray Goulburn milk
price 1990 to 2009
17
Farmgate market outlook in 2009/10
Southern:
• Opening prices announced
Fresh milk regions:
• Security of year-round supply
• Indicative avge for Vic:
remains the driver
$3.60kgMS, down 35%
• Contract prices set in 2008
• Lower end of DA forecast
remain in place
• Full year outlook?
• Increased gap between
• S & O forecast down by 10southern and NSW/Qld prices
15% ($4.00 to $4.60)
• $A critical to final outcome,
• Some prices under pressure
commodity prices need to rise
due to surplus milk at times
• Customers making shorter
commitments due to caution on • WA decline is stronger due to
production growth & market
market conditions
deterioration in commodities
• Fresh milk processors will
mark off manufacturers but
conscious of supply risks
18
Milk production – slow recovery
 Input prices remaining firm
 Water access uncertainty
 Improved rainfall in northern
regions
water
Feed
production
Milk
production
Export
Processing/
manufacturing
Marketing
supplements
Import
Dist’n
Retail
Food service
 Underlying confidence in demand
 Stalled investment due to financial
market turmoil
 Short-term cashflow crisis in south
 Uncertainty: climate & systems
19
National Dairy Farmer Survey
150
100
Tas
WA
SA
Bega
FNQ
NSW
0
SEQ
• Fieldwork conducted from
mid-February to early March
50
Gipp
s
• Similar to last year
• 191 in Western Victoria
200
WV
• 1,002 farmers interviewed
250
NV
• 6th year of NDFS survey
• Response rate remained
quite high at 72%
• 69% in 2008
• Follow-up survey planned for
early September
20
Production sector
is a story of several industries
Where
Short-term
market
outlook
Input costs
Confidence
Southern
Pasture
Gipps, West
Vic, Tas, Sth
SA, WA
**
***
***
Southern
MDB
Nth Vic &
Riverina,
inland NSW,
SA river
**
**
**
Fresh
milk
supply
Sth Qld,
NSW &
other
*****
***
****
Farmer sentiment on these issues driven
by nature of milk supply arrangements
and seasonal conditions
21
Attitude to the industry
Attitude towards the future of the dairy industry
(% farms)
22
3 year outlook
Expected changes in production by region from
2008/09 to 2011/12 season (% of production)
23
Future challenges for growth
Opportunity
• Strong faith in medium to long
term prospects for the dairy
industry
• Latent investment interest in
the sector
• Land value impact of MIS
failure
• Scope for gains from risk
management
•
•
Feed security
Milk sales
Threat
• Increasing volatility of
margins
• Damage to herd capacity
from 2008/09 market slump
• Uncertainty ahead
•
•
Impact of CPRS
Ongoing access to water +
certainty of trading market
regimes
• Labour & skills
•
Improved ability to compete
24