Dairy 2009 – Situation & Outlook Industry briefing 22 May 2008 (final) 1 Western Victoria Roadshow.
Dairy 2009 – Situation & Outlook Industry briefing 22 May 2008 (final)
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Transcript of Dairy 2009 – Situation & Outlook Industry briefing 22 May 2008 (final)
Dairy 2009 – Situation & Outlook
Industry briefing
22 May 2008 (final)
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Western Victoria Roadshow
Retail
ExportMilk
production
Food serviceDist’n
Marketing
Processing/manufacturing
Import
Inputs
supplements
water
Sustained competition for milk
Choices in market/product mix
Capacity pressures in Nth Vic
Processing consolidation
• 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
Cautious market recovery with slow GDP growth
Ongoing risk of volatility Restored EU/US intervention Trade reform complicated by
short-term protectionism
Rough road to recovery
Underlying confidence in demand
Stalled investment due to financial market turmoil
Short-term cashflow crisis in south
Uncertainty: climate & systems
Input prices remaining firm
Water access uncertainty Improved rainfall in
northern regions Asset values under
pressure
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Effect of the GFC on global dairy market
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DemandEconomic climate Supply
Recession in developed economies
Consumers trading-down dairy spend
Crop plantings harder to fund in some countries
Reduced milk supply expansion
Reduced demand volumes
Tightened credit markets
Initial limits on trade credit
High risk exposures for major banks
Rebalancing of dairy markets
Lower disposable incomes in
developing world
Firm grain/feed prices due to crop limits
Squeezed milk production margins
Reduced product prices
Build-up in dairy stocks
Buyer caution on volume & price
Unreliable climates
Supply response to high 2008 dairy prices
EU/US intervention
restored
Currency exchange rate volatility
Retail
ExportMilk
production
Food serviceDist’n
Marketing
Processing/manufacturing
Import
Feed production
supplements
water
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
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Stabilising international prices
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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
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US & EU SMP stocks have reappeared
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Impact of subsidiesClears 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 w
orld price
subsidy
Exporter offer price
New
world price
Major exporter production
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
EU
-27
US
NZ
Au
st
Arg
en
tin
a
Bra
zil
% c
hange
2007
2008
2009
World market outlookShort 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?
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Long range global outlook
Retail
ExportMilk
production
Food serviceDist’n
Marketing
Processing/manufacturing
Import
Feed production
supplements
water
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
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• 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
Domestic market a bright spot
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0% 4% 8% 12% 16% 20%
Milk - Fresh
Milk - UHT
Cheese -cheddar
Cheese - Non-cheddar
Butter
Dairy blends
Volume
Value
Supermarket growth by categoryYr to May 2009
“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
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Retail
ExportMilk
production
Food serviceDist’n
Marketing
Processing/manufacturing
Import
Feed production
supplements
water
Challenges from both sides
• 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
Sustained competition for milk Choices in market/product mix Capacity pressures in Nth Vic Processing/marketing consolidation following
NatFoods merger with ACF
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Shifting market mix• Home market more important with more of the milk?• Respective market/product returns evaluated
Australian industry market mix
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Farmgate market
Average export returns and Murray Goulburn milk price 1990 to 2009
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Farmgate market outlook in 2009/10Southern:• 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
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Retail
ExportMilk
production
Food serviceDist’n
Marketing
Processing/manufacturing
Import
Feed production
supplements
water
Milk production – slow recovery
Underlying confidence in demand
Stalled investment due to financial market turmoil
Short-term cashflow crisis in south
Uncertainty: climate & systems
Input prices remaining firm
Water access uncertainty Improved rainfall in
northern regions
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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
0
50
100
150
200
250
NV
WV
Gip
ps
SE
Q
NS
W
FN
Q
Be
ga
SA
WA
Ta
s
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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
***** *** ****
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Farmer sentiment on these issues driven by nature of milk supply arrangements
and seasonal conditions
Attitude to the industry
Attitude towards the future of the dairy industry (% farms)
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3 year outlook
Expected changes in production by region from 2008/09 to 2011/12 season (% of production)
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Future challenges for growthOpportunity• 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
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