Global dairy outlookPresentation to ADPI 2017

Steve Spencer

Freshagenda

Some fundamentals

•Keynes: “Better to be roughly right than precisely wrong”

•Add up the whole picture…and watch what drives variables that matter

•Net trade, Powder stocks drive values

•No magical “equilibrium”

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Projected Commodity values

Our approach

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Import demand growth?

Historical balance

Milk growth

Projected trade balance

Market tension

Product mix

Domestic use

Export availability

Trade dataProduction data &

balance sheetsHistorical

Projected

Market tension

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Market tension index (MTI) was set at 100 on 1 July 2012

China’s bubble deflating

EU slowed (avoid fines)

Russian embargo

EU output sped up

EU & NZ slowed

Powder stocks drive value

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Market tension index (MTI) was set at 100 on 1 July 2012

Powder stocks drive value

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Market tension index (MTI) was set at 100 on 1 July 2012

How did we get here?

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Net export availability = 6.2bn litres

(about 6% oversupplied)

How did we get here?

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Domestic cheese markets grew

2.7% p.a.

Smaller marketsChina (1.9)Russia (2.4)

Balance went into stocks!!

How did we get here?

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Net export availability = 6.2bn litres

(about 6% oversupplied)

What happened in 2016?

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Not much!

•Mostly in balance

• Late false flurry

•More SMP into sheds

•“Other” helped

Values aligned

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Where from here?

What HASN’T changed

•Market is highly sensitive

•Short term change?–Weather

–Buyer sentiment

–Gov’t policy

•Commodity-exposed players are fragile–NZ, Aust, Argentina

• Long-term demand is sound … but conditional

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What HAS changed

•Key markets are smaller

•EU unshackled

•Oil is cheap

•Global demand is more cautious

Hot items

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…the strength of impact* .. and their likely timing (months)

now 6-12 mths 18mths 24mths ongoing

How fast will EU’s milk recover?

The use of intervention stocks?

Expanding US milk supply

How will NZ milk rebound?

Will China’s imports gap grow?

Is an El Niño on the way?

Can the oil market recover?

Will low prices spur demand?

Can fat markets stay hot?

The recovery in supply

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Excess supply

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Contrasting impacts of price

volatility

EU: bigger + rebounding

Back in growth

•Settled at new norm?–Steady milk prices

–Good farm margins

• 2017 increase - 0-0.5%

•Cheese: key to stability

•But…more intervention–Where does it end up?

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NZ: weather + confidence

Cautious recovery

•Weather drives the outlook

• Improved confidence ~$6/kgms–Balance sheets still damaged

–Investor anxiety remains?

•El Nino back on the radar

•We expect 3% growth PY2018

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NZ: weather stories

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October 2016

January 2017

April 2017

NZ: weather stories!

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Weather stories that didn’t change much

US outlook

The juggernaut rolls on!

•Growth steadily improving–Margins supportive

–Exceeding plant capacities

• Increasing trade influence–Cheese, SMP

–US$ direction?

•Mexican risk?

•Cheese market still robust

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Sluggish demand?

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A slow take off?

Developing world demand

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Price sensitive buyers

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China

Good and bad

•Consumer spending weak

•Weak growth in powders

• Local supply fragile

•Strong for cheese (QSR), IMF (O/S brands)

•Milk normalising

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Oil, feed, milk powder

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Intervention = two-tiered tension

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A “balanced” market

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Outlook: Highlights

Big uncertainties remain

•EU powder stocks– build & release

•EU farm resilience H2-2017

•Oceania weather

•Conflict + oil recovery?

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Important “what-ifs”

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*indicates mix adjusted to apply change in milk flow to SMP

Some bigger risks…

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Trade policy and dairy labour?

Stability of the EU?

Outlook: Long-term?

•Demand growth is faster–In theory!

•Ongoing value growth (at 2-3%)

•Supply constraints?–EU (volatility, community)

–NZ (land, environment, systems)

•Supply gap = 7bn litres

•Domestic demand will remain crucial

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Thank you

steve@freshagenda.com.au

+613 84140904

www.freshagenda.com.au

@freshagenda2013