Outlook & future trends in the dairy sector

Lafougere Christophe

GIRA

Dairy in the World-Present and future

… the 5 main reasons of the current crisis

Are they still there?What's next?

4

The drastic reduction of Chinese importers’ interest (primarily) in WMP

+500 KT

-320

KT

Forecast of Chinese dairy commodity importsGrowth still limited

Chinese imports of the main commodities 2012-2021f

6

Is WMP Still the Best Product for China?WMP will keep an important share but growth will come more from

other products Dairy Imports in % of Milk Eq., 2014-2021t

7

Chinese Investment abroad in IF and UHT milk

IF: foreign capacity realised or announced/2016 imports = 110%

That also means less demand for SMP (and WMP) for IF production in China.

Drinking milk: foreign capacity realised or announced /2016 imports = 55%.

An important share of future imports will come from Chinese Investments abroad

Chinese investment abroad in production capacity, compared

to imports

There could already be excess foreign capacity, if all this future production is imported to China.

The Russian import embargo eliminated around 250KT of (mostly EU) cheese exports and thus

… left over 2 billion litres of milk looking for a home

The Russian embargo will continue at least until beginning of 2018

At the end of May 2016 Russian Prime Minister Dmitry Medvedev ordered the government to extend the embargo until the end of 2017, saying that he was concerned about the interests of the domestic

agricultural industry.

But we've already been able to replace Russia …

10

EU: cheese exportsEurope have been able to replace Russia but with a drastic price

reduction

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400

500

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RU

LB

AU

EG

DZ

KR

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EU 28 Cheese Exports by Destination, 2007-17f

11

Russia dairy fats situation

Back to 2009-2012 level.

+ 20 KT imports needed between 2016 and 2021

Dairy Fats Balance, 2005-2021f

12

The steep rise in the US dollar

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BRL

GBP

EUR

CAD

AUD

CNY

JPYSource: Gira based on FX Sauder

LC buys less USD

LC buys more USD

Imports more expensive for EVERYONE

13

Oil priceA sharp drop and no quick return to $100 in sight for 2017

juil.-2008133$

déc.-200840$

mars-2012125$

janv.-201631$

juin-201648$

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Source: Gira based on EIA

Total dairy import Values are a function of the Price of oil in the main Petro-Economies

EU Milk collection growth will continue to slow down in 2017

2014: +6.1 mio tons/2013+4.3% growth

2015: +3.7 mio tons/2014+2.5% growth

2016: +2.5 mio tons/2015+1.6% growth???

2017: +1.2 mio tons/2016+0.8% growth

16

It seems that we are, at last seeing the light at the end of the tunnel

What about the future?

18

Links between commodity volumes and their price

Traded volumes of all 3 commodities continue to grow, probably to around 2.5 million tons each by 2019

But there is no correlation between annual growth of volumes and movements of prices.

No statistically significant links seen to date between annual prices and total world volumes traded

19

World Milk Production: +93 mio t 2016-2021EU, IN, US already largest producers & will increase the most

World Milk production 2016, mio tons (bars denote 2016-2021 total volume change in mio tons)

2016-21 volume change

(mio tons)

* including buffalo milk

Source: Gira compilation

(excluding India) 2016 2021 2015/05 2021/16

Dairy Herd (mio hd) 104.1 104.7 -0.1% 0.1%

Milk Production (mio t) 511.7 545.8 1.7% 1.3%

CAGR

20

Strong growth in the EU & USWorld Cheese Production: +2.1 mio t 2016-2021

World Cheese Production 2016e, ‘000 tons, and the extra volumes through 2021f (bars denote 2016-2021 total volume change in ‘000 tons)

2016 2021 2015/05 2021/16

Production 21,430 23,570 2.4% 1.9%

Consumption 20,700 22,810 2.2% 2.0%

GDC countries are net exporters to the rest of the world

Cheese in GDC Countries

CAGR000 tons

2016-21 volume change

(000 tons) Source: Gira compilation

21

India to dominate global production growthWorld Dairy Fats Production: +2.0 mio t 2016-2021

World Dairy Fats Production 2016e, ‘000 tons, and the extra volumes through 2021f (bars denote 2016-2021 total volume change in ‘000 tons)

2016 2021 2015/05 2021/16

Production 9,780 11,800 2.6% 3.9%

Consumption 9,430 11,570 2.6% 4.2%GDC countries are net exporters to the rest of the world

CAGR000 tons

Butterfat in GDC Countries

2016-21 volume change

(000 tons)

*This is mainly ghee, converted to beq.

Source: Gira compilation

22

Exports* / Production**A greater share of production will be exported,

especially powders

In million tons 2016 2021

WMP Exports 1.3 1.7

Production 4.9 5.3

% of Production exported 27% 32%

Cheese Exports 2.1 2.4

Production 21.4 23.6

% of Production exported 10% 10%

SMP Exports 2.0 2.3

Production 4.1 4.3

% of Production exported 49% 53%

Dairy Fats Exports 1.0 1.2

Production 5.2 5.5

% of Production exported 19% 22%* Excluding intra-EU trade ** Excl. Indian volumes

In all there should be around 3.2 million tons of extra commodities produced (excl. whey). Of this:

70% will be cheese, 85% consumed locally

1.2 mn t will be exported (nearly 40%).

23

The Big Issues in dairyBack to "business-as-usual"?

Commodity prices are starting to recover. "At last!", but in fact, probably more or less on schedule

With real reasons at last for prices to rise again – after 2 years of acute pain – the violence of the 29% rise in GDT this August alone would

indicate that prices are reacting at last. Price volatility and the cycles are still with us!

Dairy fats are still compensating. Yes they've revalued, but at the same time proteins have devalued

With Oceania butter (and cheddar) prices 50% higher than WMP & SMP (yet they were identical in April 2013), we might think a fundamental

realignment is taking place in the values of milk solids.

China is vertically consolidating. Within the Chinese supply chain… but now also abroad!

The Chinese consumer dairy market is returning to expectations – more branding, innovation, quality etc. – but also more competition and lower

margins. The big change is that China, with its very deep pockets, is rapidly increasing its direct control over its supply sources and their added

value.

Some dairies are booming. Low milk prices further strengthen the already strong multinational dairies

The largest private dairies and multinational coops are getting ever bigger and stronger.

Nestlé and Danone are already too-strong-to-fail.

But what about the others? And just what are the medium-term implications of a two-speed dairy world?

… and we are getting back to trend after an unpleasant year or so. The general feeling is that the world is getting back to work after a very bad bout of flu. All that has changed is that the already big are getting

bigger, and the small weaker. All that talk of finding "the solution" has come to nothing.

In fact, there is nothing to make us think that what we have seen in the last 2 years won't be back with us

again in two to three year's time.

Thank you for your attention

The future?