1

Australian Nut Conference 2019

Impacts of trade policy in China on Edible Nuts

Damien Houlahan

27 4056 - 63

2011 2016 2022

8.2% 3.4% 1.7%

Edible Nuts Global GDP Agriculturaldemand

US$40bn industry, growing at ~8% CAGR (2.4x global GDP growth rate & 4.8x agri-demand growth rate)

Source: International Nuts and Dried Fruits 2016/2017 Statistical Yearbook (Year shown represents season start year) and internal company data.(1) Represents real GDP growth.

Edible Nuts: Market size (2016)

Edible Nuts: Demand CAGR Edible Nuts has outpaced real global GDP as well as overall agri-demand growth

11.35.8 5.3 5.3 5.0 4.2 1.6 1.4

Almonds Pistachios Hazelnuts Walnuts Peanuts Cashews Pecans Other nuts

1.2 0.8 0.4 0.9 4.0 0.8 0.1 0.1Volume in m MT

Market value by nut type ($B)

Global market value ($B)

~2.4x ~4.8x

Growth benchmarks

Edible Nuts growth multiple:

Increasing research on and awareness of nut benefits leading to higher consumption

Source: International Nut and Dried Fruit (June 2017). Note: consumption excluding peanuts

Number of scientific studies on nuts have increased Increasing awareness on the health benefits of nuts

International Congress on Nutrition

International Symposium on Diabetes & Nutrition

World Congress of Public Health Nutrition

World Forum for Nutrition Research Conference0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

10

20

30

40

50

60

70

1998 2000 2002 2004 2006 2008 2010 2012 2014

Scientific studies Consumption, MT millions

Scientific studies

Consumption

Global media

Online sources – Blogs and interactive videos

Global research conferences

Rising affluence and higher GDP per capita in emerging economies

4

Consumption: USA in Top 5 acrossall nuts;China only in certain types; fragmented consumption otherwise

China Domestic Tree Nut Production

6

0

1,000

2,000

3,000

4,000

5,000

2014 2015 2016 2017 2018

MT

Pistachio

- 5,000

10,000 15,000 20,000 25,000

2014 2015 2016 2017 2018

MT

Macadamia

-

200,000

400,000

600,000

800,000

1,000,000

2014 2015 2016 2017 2018

MT

Walnut

0

2,000

4,000

6,000

8,000

10,000

2014 2015 2016 2017 2018

MT

Hazelnut

Current Duty Structure excl. Australia

7

10%

25%

5%

12%7%

10%

25%

40%

20%

27%22%

25%

50%

65%

45%

52%47%

50%

10%

25%

5%

12%7%

10%

0%

10%

20%

30%

40%

50%

60%

70%

Almonds Walnuts Pistachio Macadamia Pecan Hazelnuts

USA Before 2nd April 2018 USA 2nd April - 6th July 2018USA 6th July 2018 onwards WTO Countries - 2019

China Import Duty for Australian Origin 2015 –2019

8

19.2%

14.4%

9.6%

4.8%

8%

6%

4%

2%

19.2%

14.4%

9.6%

4.8%

19.2%

14.4%

9.6%

4.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015 2016 2017 2018 2019

Australia

Almonds In Shell Almonds Shelled Macadamia In Shell Macadamia Shelled

0%

The “Grey” Trade

9

US Tree Nut Exports to China from 2015

10

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Pistachio (.95is) Almond ke Walnut (.85is) Hazelnut (.85is) Pecans (is)

2015 (MT) 2016 (MT) 2017 (MT) 2018 (MT)

Australian Nut Exports to China from 2014

11

- 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000

2014 (MT) 2015 (MT) 2016 (MT) 2017 (MT) 2018 (MT)

Australian Volumes by Nut by Year

Almonds Tonnes Macadamia Tonnes (.95is)

$-

$50,000

$100,000

$150,000

$200,000

2014(MT)

2015(MT)

2016(MT)

2017(MT)

2018(MT)

Australian Value by Nut by Year ('000)

Almonds Macadamia

Australian Almond Exports to China are Increasing

12

Australian vs. US Almond Exports to China

13

578

58,468

11,414

58,493

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

AUS USA

MT

2017 (March - December) 2018 (March - December)

19.3%

10.67%11.4%

% of total exports

1.1%

14

-47%

-54%

-74%

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

July August September October November December January February

LBS

US Almond Exports China, Hong Kong & Vietnam

2017/18

2018/19

% Change MoM

15

2017/18 2018/19 Inc/ Dec

Feb YTD 82,084,726 89,895,440

54,348,648 61,811,896

3,894,511 7,654,811

Total 140,327,885 159,362,147 14%

Feb FTM

2017/18 2018/19

China 2,737,300 1,862,147

Hong Kong 2,609,683 2,149,000

Vietnam 747,000 233,950

Total 6,093,983 4,245,097 -30%

Jan FTM

2017/18 2018/19

China 995,783 6,872,034

Hong Kong 2,046,720 437,991

Vietnam 710,901 2,141,119

Total 3,753,404 9,451,144 152%

US Pistachio exports to China 2019 (lbs)

** Short crop in Iran

China Nut Imports – Current Economics for Almonds

16

Legal Trade Border Trade

Australia - China main port

US - China main port (50% tariff)

US - China main port (10% tariff)

AUS/US - HK/VN - China

USD/LB USD/LB USD/LB

NPIS (CIF China) 2.28 2.28 2.28 2.28

Duty 1.14 0.23 0.41

VAT 0.23 0.34 0.25

Landed China Cost

2.51 3.76 2.76 2.69

% difference 50 10 7

** Current domestic market in China for NPIS is only reflecting a USD$2.34/LB price level

Conclusions

17

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game. Price implications will result across the nut sector – short term positives for Australia – particularly in almonds – but longer term implications on demand growth for all nuts.

Conclusions

18

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game.

• Short term we have seen a spike in Australian almond imports into China which has no doubt been lucrative but we have not seen a similar response in Macadamias ( superior South African quality / increase in domestic supply ). In reality it must be noted that in the case of Almonds, Australia does not have near the overall supply ( and grade requirements ) to replace US imports entirely.

Conclusions

19

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game.

• Short term we have seen a spike in Australian almond imports into China which has no doubt been lucrative but we have not seen a similar response in Macadamias ( superior South African quality / increase in domestic supply ). In reality it must be noted that in the case of Almonds, Australia does not have near the overall supply ( and grade requirements ) to replace US imports entirely.

• With an uncertain and spasmodic “Grey Channel” still operating in some form this has continued to limit gains for Australian pricing against legal channels and the 50% duty spread on offer.

Conclusions

20

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game.

• Short term we have seen a spike in Australian almond imports into China which has no doubt been lucrative but we have not seen a similar response in Macadamias ( superior South African quality / increase in domestic supply ). In reality it must be noted that in the case of Almonds, Australia does not have near the overall supply ( and grade requirements ) to replace US imports entirely.

• With an uncertain and spasmodic “Grey Channel” still operating in some form this has continued to limit gains for Australian pricing against legal channels and the 50% duty spread on offer.

• Unfamiliarity and quality inconsistency are also dragging on pricing premiums for Australian product.

Conclusions

21

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game.

• Short term we have seen a spike in Australian almond imports into China which has no doubt been lucrative but we have not seen a similar response in Macadamias ( superior South African quality / increase in domestic supply ). In reality it must be noted that in the case of Almonds Australia does not have near the overall supply ( and grade requirements ) to replace US imports entirely.

• With an uncertain and spasmodic “Grey Channel” still operating in some form this has continued to limit gains for Australian pricing against legal channels and the 50% duty spread on offer.

• Unfamiliarity and quality inconsistency are also reducing pricing premiums. • Interestingly but unsurprisingly the China domestic market – at least for

almonds – has yet not adjusted for higher import prices - clearly we are seeing Chinese domestic consumption resistance – hence market fundamentals (price in this case) could play out and we see a reduction in demand overall for edible nuts in China for the medium term. For Australia to really capitalize on the duty spread we need Chinese demand to hold. The trend in the first quarter of 2019 is not encouraging. Trade policy uncertainty is also influencing buying patterns of Chinese importers.

Conclusions

22

• Trade “disruption” ultimately leads to overall market fundamental “disruption”. Negative sum game.

• Short term we have seen a spike in Australian almond imports into China which has no doubt been lucrative but we have not seen a similar response in Macadamias ( superior South African quality / increase in domestic supply ). In reality it must be noted that in the case of Almonds Australia does not have near the overall supply ( and grade requirements ) to replace US imports entirely.

• With an uncertain and spasmodic “Grey Channel” still operating in some form this has continued to limit gains for Australian pricing against legal channels and the 50% duty spread on offer.

• Unfamiliarity and quality inconsistency are also reducing pricing premiums. • Interestingly but unsurprisingly the China domestic market – at least for almonds – has not

adjusted for higher import prices beyond 20% - clearly we are seeing Chinese domestic consumption resistance – hence market fundamentals (price in this case) could play out and we see a reduction in demand overall for edible nuts in China for the medium term. The trend in the first quarter of 2019 is not encouraging.

• China nut demand in the long term will have major implications for Australian almonds and macadamias in particular. With major supply growth on the horizon for both these nuts China has great potential to absorb this increase. Not withstanding this short term opportunity of a significant duty advantage against the US - the Australian Nut Industry in the long term would like to see disruptive impacts of trade policy removed and let the robust fundamentals in the sector play out.

Thank You

Presentation Title 23

24

-40.19%

-63.4% -84.89%

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

July August September October November December January February

LBS

US Almond Exports China & Hong Kong

2017/18

2018/19

% Change MoM

-47%

-54%-74%

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

July August September October November December January February

LBS

US Almond Exports China, Hong Kong & Vietnam

2017/18

2018/19

% Change MoM