National Dairy Farmer Survey

1
Western Victoria Roadshow
Dairy 2009 Situation Outlook Industry
briefing 22 May 2008 (final)
2
Rough road to recovery

• Cautious market recovery with slow GDP growth
• Ongoing risk of volatility
• Restored EU/US intervention
• Trade reform complicated by short-term
  protectionism

• 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

water
Export
Milk production
Processing/ manufacturing
Inputs
Marketing
Retail
supplements
Distn
Import
Food service

• Underlying confidence in demand
• Stalled investment due to financial market
  turmoil
• Short-term cashflow crisis in south
• Uncertainty climate systems

• 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
  commodity prices

3
Effect of the GFC on global dairy market
Economic climate
Supply
Demand
Supply response to high 2008 dairy prices
High risk exposures for major banks
Initial limits on trade credit
Crop plantings harder to fund in some countries
Tightened credit markets
Firm grain/feed prices due to crop limits
Recession in developed economies
Consumers trading-down dairy spend
Unreliable climates
Build-up in dairy stocks
Reduced demand volumes
Lower disposable incomes in developing world
Squeezed milk production margins
Buyer caution on volume price
EU/US intervention restored
Reduced milk supply expansion
Currency exchange rate volatility
Reduced product prices
Rebalancing of dairy markets
3
4
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
Export
Milk production
Processing/ manufacturing
Feed production
Marketing
Retail
supplements
Distn
Import
Food service
5
Stabilising international prices
6
Whats driving world markets?

• 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

• 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

7
US EU SMP stocks have reappeared
8
Impact of subsidies

• 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

Prevailing world price
subsidy
Exporter offer price
New world price
9
Major exporter production
10
World market outlook

• 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?

• 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

11
Long range global outlook
12
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
Export
Milk production
Processing/ manufacturing
Feed production
Marketing
Retail
supplements
Distn
Import
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

13
Domestic market a bright spot
14
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
• Other
• Strong value push in retailer promotion
• Faster sales growth by Aldi

• 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

14
15
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
Export
Milk production
Processing/ manufacturing
Feed production
Marketing
Retail
supplements
Distn
Import
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

16
Shifting market mix

• Home market more important with more of the milk?
• Respective market/product returns evaluated

Australian industry market mix
17
Farmgate market
Average export returns and Murray Goulburn milk
price 1990 to 2009
18
Farmgate market outlook in 2009/10

• Southern
• Opening prices announced
• Indicative avge for Vic 3.60kgMS, down 35
• Lower end of DA forecast
• Full year outlook?
• S O forecast down by 10-15 (4.00 to 4.60)
• A critical to final outcome, commodity prices
  need to rise
• Customers making shorter commitments due to
  caution on market conditions
• Fresh milk processors will mark off manufacturers
  but conscious of supply risks

• Fresh milk regions
• Security of year-round supply remains the driver
• Contract prices set in 2008 remain in place
• Increased gap between southern and NSW/Qld prices
• Some prices under pressure due to surplus milk at
  times
• WA decline is stronger due to production growth
  market deterioration in commodities

19
Milk production slow recovery

• Input prices remaining firm
• Water access uncertainty
• Improved rainfall in northern regions

water
Export
Milk production
Processing/ manufacturing
Feed production
Marketing
Retail
supplements
Distn
Import
Food service

• Underlying confidence in demand
• Stalled investment due to financial market
  turmoil
• Short-term cashflow crisis in south
• Uncertainty climate systems

20
National Dairy Farmer Survey

• 6th year of NDFS survey
• 1,002 farmers interviewed
• Similar to last year
• 191 in Western Victoria
• Fieldwork conducted from mid-February to early
  March
• Response rate remained quite high at 72
• 69 in 2008
• Follow-up survey planned for early September

21
Production sectoris 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
22
Attitude to the industry
Attitude towards the future of the dairy industry
( farms)
23
3 year outlook
Expected changes in production by region from
2008/09 to 2011/12 season ( of production)
24
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