Dairy Market and Price Report

30th July, 2015

Short market summary

• Global output growth slowing down• But stocks + output still exceeding demand short term• Demand strong (at a price) in Africa, SE Asia, M East• Demand also strong in US (utilising internal output)• EU output post quota a mixed, and unclear, picture, but overall

no massive growth so far• EU exports well up in 2014 and into 2015• But prices/demand depressed due to absence of China and

Russia• Also buyer behaviour capitalises on negative sentiment and

prolongs the downturn• Weather factors present/in the offing which could turn this around

quickly.• Serious on-farm profitability crisis in many regions – especially EU

and NZ, this will turn output around too, but more slowly.

EU output post quota: mixed picture

• France and Germany (= 35%+ of EU milk) static or modestly up• Netherlands, UK, Poland, Ireland (=28% of EU milk) well up• Other MS – flat to down• Overall EU: static to May, but will grow thereafter. EU Commission prediction +1% for full year 2015

Global output growth slowing

Source: Ornua

Output - outlook

• Weather events – can rebalance supplies quickly• Heatwave/drought in parts of Europe (France in particular)• Long term and severe drought in California (20% of US milk)• El Nino event confirmed over Oceania. Impact on Australian

and (possibly) NZ supplies, if any, expected from September.

• Profitability – is slower at rebalancing markets• Problematic in Europe – increasing disquiet among EU farmers.

French dairy farmers protesting, some national support measures. Demands for EU action (intervention, use superlevy to support dairy sector, production management measures…)

• Very problematic in NZ – Fonterra admits milk price 20% below production costs

• Output will fall, but it will take more time if no significant weather event, as farmers, even if not profitable, may chase cash flow.

Heatwave impacting French and German output

NZ profitability increasingly challenged by rising costs and lower prices

Source: DairyNZ

Demand-side issues

• China - has yet to return to powder purchasing in any significant way. Economic performance poor.• Russia – extension of embargo on EU imports

announced, this time including lactose free products. GDP forecast down 3.5% due to sanctions and reduced oil revenues. Domestic dairy sector “superheated”. Product and milk prices rising massively, further discouraging consumption. Avg milk price is €0.5/kg (EU average around $0.31/kg).• GDT – a run of 9 negative results has driven the GDT

index to just below 2009 levels, influencing sentiment

GDT headline results

GDT milk price equivalent: SMP/BUTTER 23.8c/l before processing costsWMP 19.66c/l before processing costsThese levels are unsustainable from a production cost point of view.

But, lots of positives on demand, too!

• Strong internal US demand keeps US butter and cheese off world market, and could consume much of 2015 output increase. • Muslim countries - Ramadan now over, demand expected to

pick up, with 3rd quarter powder tenders likely to benefit EU.• Heat wave in Europe favours ice-cream/cream consumption. • Also EU consumer confidence is returning, benefiting

consumption of yoghurt, butter and milk drinks.• Weak Euro continues (esp with Gre-ferendum/Gre-xit), making

EU products competitive on export – this is particularly good for EU butter prices, which have rallied a little)• Since Russian ban, US main EU export destination. Exports out

of the EU continue to increase.• China – recent recalls of locally produced infant formula could

reinforce import preference

EU prices easing further but above GDT.

Gross returns approx 29.5c/l,

around 5c/l above GDT

Irish SMP price almost at intv level, butter holding better.

EU milk price evolution last 12 mths

Source: EU MMO

Average EU milk price

Source: EU MMO

NZ – Fonterra milk price/pay out

Approx 19c/l

Approx 22c/l

US milk prices

Approx 34c/l

Irish milk prices

Ornua June PPI = 28.08c/l incl VAT at 3.3%p 3.6%f (29.3c/l incl VAT at actual constituents)

Source: Ornua

FJ/KPMG 2014

Price reductions April 14 to June 15 – avg 11c/l(net of VAT)

28% cut in milk price = 78% cut in margin peak

to trough

April 2014 = 39c/l incl VAT.

June 2015 = 28c/l incl VAT.

11c/l cut = 28%

Source: FJ Milk League – most recent available is May 2015

June milk price decisions

• Glanbia – base price -1.5 = 26c/l + 1 co-op + 1 stab fund = 28c/l incl VAT• Kerry – Holding (27.77c/l incl VAT) – own estim.• Lakeland –0.75c/l to 28.00c/l incl VAT.• Aurivo – base price – 2 = 26c/l + 2 from volatility

fund = 28c/l incl VAT (own estim.)• Dairygold – 1c/l = 27c/l incl VAT• Arrabawn -1.5c/l = 27.87c/l incl VAT • Carbery – 1c/l cut to 28.9c/l incl VAT (individual co-

ops will pay farmer on this base)• Town of Mon – 1c/l to 28 c/l incl VAT

IFA milk price/EU support campaign

• Lobbying of board members • Farmers cannot take further cuts (costs, margins, cash flow, need to fill

new processing capacity…)• Co-ops need to renew focus on efficiencies, consolidation…• Fonterra/Friesland Campina doing just that for that reason

• Intervention review• Legal mandate for the EU Commission in 1308/2013

• EU Commission must monitor costs and markets and adjust intervention prices where needed.

• IFA has shown why it is needed now (paper)• IFA lobbying TDs, MEPs, Minister + Commissioner. • IFA persuaded COPA to support (unanimously)• Also in EP report• Minister’s statement after today’s (13th July) Ag Council• EU Commissioner extends APS and intervention dates – good, but not

enough.

• Superlevy use to support farmers• Only €441m factored into EU 2016 Estimates, leaving same again