Dairy 2009 Situation and Outlook. October 2009

Transcription

1 Dairy 2009 Situatin and Outlk Octber

2 Octber 2009 Update Abut this reprt The Situatin & Outlk prcess is designed t prvide the Australian dairy industry and its stakehlders with an verview f the entire industry supply chain frm dairy farm inputs t cnsumer markets. This is the first update t be released, fllwing the publicatin f the annual Dairy 2009: Situatin & Outlk reprt published in June The reprt has been cmpiled with input frm industry rganisatins and dairy cmpanies, as well as a range f infrmatin surces. This updated reprt Summarises the perating cnditins facing the Australian dairy industry supply chain, and ultimately affecting the prfitability f dairy farms; Summarises the highlights frm the fllw-up survey t the 2009 Natinal Dairy Farmer Survey cnducted in September; and Prvides a brief verview f the current industry status and the situatin and utlk fr the key drivers f the Australian dairy industry. Table f Cntents Australian dairy supply chain Page 3 Key driver utlk Page 4 The Australian dairy industry in Octber Page 5 Industry insights Page 8 September farmer survey results Page 9 The Six Key Drivers Glbal Ecnmy Page 13 Glbal Demand Page 15 Cmpetitive landscape Page 16 Australian market Page 17 Glbal Supply Page 18 Inputs Page 20 Exchange Rates Page 22 This Situatin and Outlk Quarterly Update is published fr infrmatin nly. It is prduced with due care and attentin t accuracy, but Dairy Australia accepts n liability if, fr any reasn, the infrmatin is inaccurate, incmplete r ut f date. Cpyright Dairy Australia All rights reserved. 2

3 Australian Dairy Supply Chain Highly variable seasnal cnditins acrss dairying regins impacting n farmers ability t manage lw spring cash flw Manufacturers carefully assessing market and prduct mix in rder t maximise returns including exprt vs dmestic Signs f demand recvery as ecnmic utlk imprves and buyers return t the market Gvernment stcks and interventin in the Nth Hemisphere verhanging market Weak USD impacting exprt returns and cmmdity prices water Inputs supplements Milk prductin Prcessing/ manufacturing Imprt Marketing Exprt Retail Dist n Fd service Input prices cntinue t ease - with grain prices weakening due t increased supplies Dmestic market vlumes and whlesale prices still hlding steady - cnsumers ecnmising 3

4 Key driver utlk Glbal ecnmy Glbal demand Australian market Glbal supply Inputs Exchange rates Majr discussin pints Asian ecnmies recvering faster than EU, USA and Australia. Asian cuntries lifting ther ecnmies ut f ecnmic slump. Mdest signs f recvery in US and EU, but risks are still weighted n dwnside. Strnger perfrmance f Australian ecnmy increasing the likelihd f further interest rate rises. Internatinal buyers returning t the market with increased activity, as cmmercial inventries have cleared and refilling f supply pipeline begins. Cnsumer demand supprted by lwer retail prices, particularly in Asian markets. Signs f imprved cnsumptin patterns have emerged in large vlume markets such as China, Russia, US and Eurpe. Dmestic cnsumptin remains rbust. Grwth returning t supermarket cheese sales. Cnsumers cntinue t seek value thrugh private label fferings. Dairy prduct whlesale price trends have remained steady in recent mnths. Interest rates likely t cntinue rising, cutting discretinary spending. Market frces limiting milk prductin grwth arund the wrld. Prductin grwth has slwed in US, Brazil and many parts f Eurpe in Slwing sales f surplus prduct t gvernment interventin stres. Existing gvernment stckpiles prvide an nging anchr n wrld market prices. Impact n perating cnditins r key driver status: Grain prices cntinuing t trend dwn due t strng lcal crp prspects and large nrthern hemisphere harvests. Strng AUD pushing dwn imprt csts, frcing il and fertiliser prices lwer. Increasing interest rates will increase financing csts Water allcatin n Gulburn and Murray Systems increased t 30% and 29% respectively. Australian dllar t remain high while lcal ecnmy utperfrms the EU and USA. US dllar weak against mst majr currencies increasing imprt affrdability and supprting higher exprt ffers frm EU and NZ. Glbal financial institutins predict wide range fr AUD (68-95 US cents) but Australian banks are frecasting US cents thrugh t the end f Psitive Steady Negative 4

5 The Australian dairy industry in Octber 2009 Australian dairy farmers are facing the immediate challenge f managing tight cashflw with highly variable Spring cnditins. Hwever as psitive signs f a turnarund fr the industry are emerging, farmer plans hang in the balance. The lwest pening farmgate milk prices fr 5 years mean many dairy farmers are currently perating at belw break-even levels, despite falling input prices. An estimated 95% f farmers surveyed in early September have had their farmgate price significantly reduced in In respnse farmers have implemented multiple strategies - mainly restructuring debt (43%) and reducing herd numbers (37%), while 34% have cut the amunt f feed. Cnfidence has been impacted, hwever 60% f farmers remain psitive abut the industry s future. This is an encuraging result, underpinned mre recently by imprving market signals, further easing in input csts particularly grain - and sme gd mid-spring rainfall. Fig 1: Farmers attitude t industry future The timing f imprved signals is critical fr 43% f farmers surveyed in the lwer Murray Darling Basin wh will decide whether t cntinue dairying befre the end f Decisins will be based n irrigatin water allcatins, nw the best fr fur years at this stage f the seasn, milk prices and Spring rainfall. Mre generally, the prprtin f farmers surveyed in September cnsidering leaving the industry in three years time increased t 16% cmpared with 3% in March. This respnse is understandable given the severe financial stresses n farmers at that time. While cnditins are imprving fr sme, farmers are cntinuing t assess their ptins carefully. Dairy Australia s frecast fr 2009/10 milk prductin is 9.0 billin litres, 4% dwn n 2008/09 prductin. This reflects the impact f farmer exits frm Nrthern Victria/suthern Riverina, wet cnditins in Tasmania and the reprted reductins in cw numbers and supplementary feeding rates acrss the industry. Internatinal cmmdity prices have increased sharply in US dllar terms ver the last quarter. After running dwn stcks ver a number f mnths, there are nw clear signs f increased buyer activity, and a greater willingness t purchase ahead f immediate requirements. While the rapid turnarund in cmmdity prices is gd news, a recvery in demand may be prematurely burnt ff by t rapid an increase in prices. Ideally, a gradual ecnmic recvery wuld lead t steady imprvements in dairy cmmdity prices and mre sustainable pricing fr the lnger term. Hwever, while uncertainty arund a sustained glbal recvery remains, internatinal dairy market cnditins are likely t remain 5 vlatile.

6 The Australian dairy industry in Octber 2009 Signs f slwing US prductin, and the likelihd f lwer supplies frm the suthern hemisphere, cupled with imprving demand are bringing the internatinal dairy market back int balance. Hwever, EU and US gvernment interventin and stckpiles will cntinue t have a negative impact n market sentiment until they are remved. Assuming there are n further glbal ecnmic shcks, internatinal pwder prices are likely t trade abve US$3000 per tnne ver the cming mnths, while butter prices shuld maintain their recent gains, given a recvery in Russian demand. Fig 2: Spt exprt prices Sep 2003 t Sep 2009 While this has erded returns t exprters in lcal currency, it has als underpinned sme f the imprvement in dairy cmmdity prices, by imprving the purchasing pwer f imprting cuntries, and increasing the ffer prices f cmpeting exprters in US dllar terms. Current frecasts fr the Australian dllar vary widely - frm 68 t 92 cents by December 2010, with a number f financial institutins currently upgrading their frecasts. The large range cntinues t reflect the cntinued uncertainty surrunding the wrld ecnmy in The strength f the Australian dllar pses the majr threat t imprved farmgate prices in 2009/10. Current cmmdity market and exchange rate settings suggest a full year price f between $4.00 and $4.30 per kg MS in suthern regins. Fig 3: Exprt index Sep 2005 t Sep Jan 2000 = 100 $US terms 200 $AUD terms Currency mvements are having a majr influence n Australia s exprt prspects. The US dllar has weakened against the Australian dllar, and mst majr currencies Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 6

7 The Australian dairy industry in Octber 2009 Gd news Demand cnditins cntinue t imprve in key markets. Retail prices are easing, ecnmic cnditins are imprving and cnsumer sentiment is rebunding. A gradual unfreezing f trade finance has helped underpin the market recvery. The Australian market cntinues t prvide gd grwth and steadier returns. Fresh supply f dairy prducts is stagnating in mst parts f the wrld, which is helping t bring the market int better balance. Sales f surplus pwder and butter int gvernment stckpiles in the Nrthern Hemisphere are drying up. First substantial mid-spring rains in suthern dairying regins since Imprved water allcatins fr farmers in Gulburn and Murray systems. Dmestic cnsumptin grwth in Suth and Nrth America is limiting exprt prduct availability. Bad news Strength f Australian dllar is ffsetting imprvement in cmmdity prices. The strength f the Australian ecnmy is likely t prmpt the Reserve Bank t cntinue lifting interest rates int This will supprt a higher Australian dllar and lift financing csts fr the industry. EU and US market interventin entrenched fr next 12 mnths. Surplus gvernment stcks still exist in the Nrthern Hemisphere and remain an anchr n the market. Key questins Hw will farmers respnd t recent step-ups, imprved Spring rainfall and water allcatins and weakening grain prices? Hw will the imprvements in sme f these factrs affect thse cnsidering exiting and the industry s 2009/10 prductin? Is glbal ecnmic recvery sustainable r will it falter? Will we see a U, V r W shaped ecnmic recvery with further shcks? With lwer prices fr all dairy prducers internatinally, hw successfully will farmers be able t manage margins ver the cming mnths, and which exprting regins will be mst cmpetitive? Are we seeing strategic buying in respnse t lw prices, r a genuine cnsumer-led demand recvery? With plicy instruments back in favur (subsidies, interventin) in the Nrthern Hemisphere, will gvernments bw t pressure t cntinue and expand the levels f supprt? What quantities f new seasn prduct will be supplied frm the Suthern Hemisphere? Issues t lk ut fr Althugh cnditins in the Russian dairy market are imprving, the gvernment is nw pursuing a range f plicies that culd again disrupt trade. The Australian dllar has been driven by interest rate differentials rather than increased cmmdity prices. What will be the currency impact f future interest rate increases cmbined with cmmdity price recvery? The prspect f NZX futures as a viable risk management ptin fr the industry. 7

8 Lwer Murray Darling Basin survey 380 dairy farmers in the lwer Murray Darling Basin were surveyed in August as an input int the Lwer Murray Darling Basin Inquiry int the factrs shaping dairying in the regin in the next five t ten years. 43% f farmers surveyed indicated they will be making significant decisins regarding the future f their business befre the end f The key factrs influencing their decisins will be milk price, seasnal cnditins and irrigatin allcatins ver that perid. A significantly larger prprtin f farmers were planning t sell permanent irrigatin water entitlement in 2009/10 cmpared with 2008/09. While sme 58,320 ML were sld in , prjected sales f permanent water fr were almst 120,000 ML. Use f carryver water was significant with 67% f surveyed farmers carrying ver an average f 35 ML fr use in the current seasn. Figure 4: Water entitlements in lwer Murray Darling Basin Industry insights glbaldairytrade...12 mnths n US$/tnne Fnterra s nline WMP auctin system glbaldairytrade has nw been perating fr ver 12 mnths, and has gained acceptance as an imprtant market indicatr. Fnterra has expanded the platfrm t include Australian rigin WMP and will als sell AMF in auctins frm Nvember. Auctin prices jumped 26% t an average f US$2,301/t in August, ending a three mnth trend f falling results and driving prices back t levels nt seen since Nvember With September average prices rising a further 24.2%, t US$2,848/t, average WMP prices increased 56% r US$1,029/t in just tw mnths. Frward cntract prices were bradly inline with spt prices, indicating buyers were cnfident abut rebuilding inventry levels. Results achieved at the beginning f Octber (average increase f 5.1%) suggest the market is digesting the strng gains ver the past tw mnths. Fig 5: gdt average WMP prices vs DA WMP price range 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 gdt weighted average price, USD/t FAS DA WMP lw DA WMP high 8

9 September farmer survey Key results In early September, 340 dairy farmers acrss Australia wh were surveyed in March were re-interviewed t update intentins and attitudes. The timing f the survey fund farmers at a lw pint dealing with the reality f the 2008/09 step dwn and the lwest pening farmgate prices in 5 years, and seasnally lw Spring prices. Many had als received limited late Winter rainfall. Since the survey was cnducted, many regins have received gd rainfall, grain prices have cntinued t weaken, step ups have been annunced by tw majr cmpanies, and market signals lk increasingly psitive. These develpments are likely t have shifted sentiment significantly frm the results reprted here. Generally survey respndents expressed greater cnfidence in their wn dairy business than they have in the wider industry, bth lcally and natinally. Figure 6: Psitive Attitude t natinal industry (% f farms) Figure 7: Attitude t industry future in lcal dairy regin 60% f respndents were psitive abut the future f the natinal dairy industry - dwn frm 65%. 56% f respndents were psitive abut the future f the dairy industry in their regin, while 36% feel negative. 66% f respndents are cnfident abut their wn dairy business. Tasmanian respndents were mst psitive abut their wn businesses (80%), while negative sentiment is highest in WA (42%). Figure 8: Attitude t industry future in wn dairy business 9

10 September farmer survey The prprtin f respndents expecting higher prductin in three years time has fallen frm 61% in March t 32% in September. Amng thse expecting t increase prductin ver the next three years, 33% attributed the anticipated increase t increasing herd size, 23% t seasnal imprvement, 24% t feeding cws better and 19% t better genetics. Figure 9: Expect t increase prductin in 3 years time In March just 3% f respndents indicated that they intended t exit the industry within three years. In the subsequent six mnths, this prprtin has risen t 16%. The mst ntable increases in thse cnsidering an exit were in SA up frm 5% t 32%, and Tasmania up frm 0% in March t 18%. Of the 95% f respndents wh experienced a significant reductin in milk price, 91% have taken at least ne curse f actin in respnse. 66% have reduced expenditure 43% have restructured debt 37% have reduced herd size 34% have decreased the levels f supplementary feed prvided 23% f farms reduced staff levels Average herd size in was expected t be slightly smaller than anticipated in February, with sme 52% f respndents expecting t milk fewer cws and just 8% planning t milk mre. Respndents t the September survey lwered their prductin expectatins fr the current seasn, with 2009/10 vlumes expected t be dwn arund 8% n the predictins they made in March. There were ver 150 different respnses implemented, indicating the diversity f individual farmer situatins and the ptins available. 77% f respndents wh tk actin t cunteract the reduced price regard the results as being fairly t very psitive. 54% f respndents wh restructured finances regarded the utcme as very psitive. 47% f respndents wh cntracted just ne area, had a very psitive utcme. 10

11 September farmer survey Reginal highlights Nrthern Victria / Riverina 98% f respndents have experienced a reductin in price and 93% have respnded, mainly by reducing expenditure (79%). 62% f respndents were psitive abut the future f the natinal industry, while 54% were psitive abut their wn enterprise. Just 34% were psitive abut the future f the lcal industry. 36% f farmers expect t increase prductin ver the next three years, dwn frm 70% six mnths ag. All respndents in the nrthern Vic/Riverina regin had experienced a reductin in milk price, and all had mved t make adjustments t their businesses. 70% f respndents have extended debt r refinanced. 14% expect t have left the industry in three years. It shuld be nted that since the survey, farmers in the regin have received a significant increase in water allcatins, and step ups by tw majr cmpanies. The LMDB survey cnducted in August (see bx n Page 8) indicated these wuld be key factrs influencing farmers decisins whether t exit the industry. Western Victria Cnfidence in the natinal industry had fallen frm 81% in March t 69%. This regin was the mst psitive abut the future f its lcal industry at 74%. 76% f respndents were psitive abut the future f their wn dairy business. 14% expect t have left the industry in three years time. Gippsland 54% f respndents were psitive abut the future f the natinal industry (dwn 2 pints). Negativity twards the future was highest in this regin (40%). 62% f respndents were psitive abut the lcal dairy industry and 68% were cnfident in their wn dairy business. 24% expected t increase prductin ver the next three years, dwn frm 64%. All respndents in Gippsland have experienced a step dwn and 88% have reacted, mainly by cutting expenditure. 20% f respndents were cnsidering quitting the industry by 2012/13 up frm 6% in March. Suthern / Central NSW 50% f respndents were psitive abut the natinal industry s future, dwn 13 pints. 63% expect higher herd prductin in three years time. 10% f respndents did nt expect t be dairying in three years time, up frm 5% in March. The prprtin f respndents in the regin wh anticipate that prductin will be greater in three years time has fallen frm 60% t just 24%. 11

12 September farmer survey Reginal highlights Nrthern NSW / Qld The prprtin f respndents psitive abut the industry s future has fallen frm 78% t 70%, hwever this regin remained the mst psitive. 66% were cnfident abut the future f the lcal industry, while 69% psitive abut their wn business. 52% f respndents expected prductin vlumes t increase by 2012/13. 3% f respndents expect t leave the industry ver the next three years, dwn frm 7%. Suth Australia 53% f SA respndents were psitive abut the future f the natinal dairy industry, with a high 39% feeling negative abut the future. SA respndents were the mst negative f all regins, with 53% negative abut the lcal industry, while 53% are psitive abut their wn dairy business. 32% f respndents expect t leave the industry within three years, up 27 pints. The sharp increase in respndents planning t exit may reflect sme specific issues arund lw lng term cntract prices being ffered t sme farmers in the regin, as well as financial pressures being felt by sme larger peratrs. Just 18% f respndents in the regin expect greater prductin in three years time, dwn 35 pints. 97% f respndents were affected by price reductins, with 61% cutting expenditure and 21% restructuring their finance. Western Australia 62% f WA respndents have cnfidence in the natinal dairy industry, dwn 10%. 55% are psitive abut the future f the lcal industry and 57% are cnfident in their wn business. 37% are expecting their herd prductin t be greater in three years time, dwn 5 pints. While 92% f WA respndents have experienced step dwns, 43% have restructured farm finances. 10% f respndents nw believe they will nt be dairying in three years time, when in March nne predicted this. Tasmania The prprtin f respndents psitive abut the future f the natinal dairy industry fell frm 80% t 60%. 63% f respndents were cnfident in their lcal industry while 80% are psitive abut their wn business. While 70% f respndents in March expected their herd t be prducing mre in three years time, this figure has nw fallen t 20%. 98% f respndents experienced a step dwn in milk price, with 95% respnding, mainly by decreasing supplementary feed levels, herds sizes and staffing. In additin t lw milk prices, Tasmanian farmers were dealing with excessive rain which in sme cases necessitated additinal supplements as pastures became unusable. This has placed additinal and nging pressure n cashflws, as many f these pastures will nw require renvatin. The prprtin f Tasmanian respndents cnsidering an exit frm the industry within three years has risen frm 0% in March t 18%. 12

13 Glbal ecnmy Asian cuntries are leading the recvery frm the glbal ecnmic dwnturn. This reflects lwer expsure t financial derivative prducts, imprved banking systems fllwing the regin s wn financial crisis in the late 1990s and large fiscal stimulus packages. Hwever, despite sme psitive ecnmic signals, significant dwnside risks remain. Withdrawing stimulus t early culd undermine cnfidence, and wrld ecnmic grwth wuld suffer if the ecnmies f China r India were t falter. The Asian Develpment Bank has suggested cuntries develp internal demand which wuld be psitive fr dairy cnsumptin, and ptentially imprts f Australian dairy ingredients. The IMF reprted ecnmic stabilisatin is uneven and that the recvery will be sluggish frecasting a 1.4% cntractin in 2009, and 2.5% grwth in Glbal rganisatins such as the Wrld Bank and IMF agree that the recvery frm an ecnmic dwnturn caused by a financial crisis tends t be deeper, and lnger, than a nrmal dwnturn. Fig 10: IMF Octber 2009 prjectins Ecnmic grwth, % change and (change frm July frecast) Wrld utput ( 0.3) 3.1 ( 0.6) Advanced ecnmies ( 0.4) 1.3 ( 0.7) USA ( 0.1) 1.5 ( 0.7) Eur area ( 0.6) 0.3 ( 0.6) Japan ( 0.6) 1.7 (N/C) Emerging ecnmies ( 0.2) 5.1 ( 0.4) Ecnmic recvery frm a financial crisis is generally slwer because husehlds in develped cuntries increase savings (thus spend less) t rebuild lst wealth in huse prices and superannuatin Sep-83 Sep-85 Sep-87 Sep-89 Fig 11: Crude il prices (US WTI, USD$/bbl) Sep-91 Sep-93 Sep-95 Sep-97 Sep-99 Surce: Blmberg / Wrld Bank The Wrld Bank suggests crude il price vlatility shuld decrease as supply capacity imprves. Hwever, average prices will increase as il becmes mre difficult t extract. Glbal crude il prices are frecast t increase gradually frm US$56/bbl in 2009, t US$66/bbl in 2011 befre hitting US$75/bbl in 2015 as prductin csts increase. This is well belw peak prices f US$140/bbl during June 2008, but mre than duble the average price f US$35/bbl ver the last 20 years. This will bst the incme f key dairy imprting cuntries in the Middle East and Russia. 13 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

14 Glbal ecnmy Update n fiscal stimulus packages The G20 meeting in Lndn in early September called n gvernments t cntinue ecnmic stimulus measures until a glbal recvery is secured. As well as agreeing t cntinue their expansinary packages until recvery is well entrenched, the G20 agreed n the need fr a c-rdinated exit strategy. which wuld be underpinned by effective c-rdinatin between fiscal and mnetary authrities, internatinal c-peratin and cmmunicatin amng cuntries regarding plicy actins. While mre than half f the 5 trillin US dllars fiscal expansin cmmitted t is yet t be spent, arguments are brewing abut when t phase ut the stimulus measures. While Britain and the US are warning against tightening t sn, France and Germany, which have already emerged frm recessin, are keen t turn ff the fiscal tap. Australia s stimulus will nt be trimmed until the natin's ecnmic grwth level has returned t a trend level f three per cent. Australia is nw the fastest-grwing ecnmy in the Western wrld and the nly Western ecnmy that grew in the year t June. Gvernment deficits are grwing rapidly and public debt has reached dangerusly high levels. High levels f public debt threaten t depress glbal ecnmic activity in the lnger-term with figure 12 highlighting hw much public debt exists in the develped wrld. Germany and Japan are big suppliers f internatinal credit, with Britain and the US heavily reliant n brrwing. The IMF estimates the public debt f the ten richest cuntries will rise frm 78% f GDP in 2007 t 114% by Fig 12: General Gvernment Grss Debt 2009 Surce: OECD Since the ecnmic crisis is s widespread, any recvery is unlikely t cme frm exprts as it did pst-war. Debt-burdened cnsumers will be cautius and have a prpensity t save mre, which is expected t slw grwth fr several years, and impact n cnsumptin. 14

15 Glbal demand The utlk fr glbal dairy demand remains mixed, with pwders likely t fare better than butter and cheese. Glbal supply pipelines have largely been cleared, and manufacturers have been running dwn inventries ver the seasnal prductin lw. Buyers appear t be strategically purchasing prduct in anticipatin f a ptentially limited availability in early Chinese ingredient buyers are back in the market purchasing large vlumes f pwders as ingredients. It is unclear hw much renewed demand is strategic buying, nw that prices are mving upwards, r whether it is cnsumer-led demand. The dwnturn in high-end htel and restaurant trade in all cuntries will cntinue, particularly in Asia and the Middle East. Lw htel ccupancy rates, and reduced turism and business travel have resulted in lwer dairy demand. Fig 13: Russian Qtly Dairy Imprts (tnnes) Reduced discretinary spending is evident in sme markets and is affecting sme impulse buying (e.g. icecream, cnfectinery and cheese). Sme brands are repsitining frm tp-tier t mid level t take advantage f a grwing middle tier f cnsumers wh are fcused n quality and branding, but remain sensitive t prices Lwer prices will drive an imprt demand recvery in sme markets in 2009/10, particularly in Africa, China and Sutheast Asia. Recmbining activity in Suth East Asia will prvide sme imprt demand grwth fr milk pwders in The ecnmic dwnturn and trade finance issues are impacting dairy trade t Russia, ne f the wrld s largest imprters f cheese and butter. Currency realignments have mre than ffset dairy cmmdity price falls, making prduct less affrdable, while letters f credit fr Russian trade are still difficult t btain. Hwever, Russia appears t be returning t the market despite these difficulties. High cheese inventries in Japan, and cmmitments t utilise new prductin facilities are likely t limit cheese imprt recvery until Subsidised gvernment prgrams in Algeria and Mexic are likely t hld dairy imprt vlumes steady in Bth cuntries are significant fr wrld dairy market balance, since they imprt large vlumes f milk pwders. There is likely t be grwth demand fr imprted dairy prduct in China (mainly f UHT milk, pwders, and infant frmula). Hwever the gvernment is attempting t impede imprt activity. 15

16 Cmpetitive landscape Prices fr cmpetitive prtein cmmdities are trending upwards, albeit slwly. A cmbinatin f supply and demand factrs have swung the market mmentum. This is gd news fr dairy cmmdity prices as it will prvide rm fr similar upward mvements. The US is expecting a bumper sybean crp in 2009/10, with prductin expected t be up 10%. Suth American sybean prductin is expected t recver strngly in 2010 frm the drught-reduced level f this year. Hwever, these increases in supply are expected t be ffset by very lw levels f stcks wrldwide. There are several uncertainties regarding future price mvements, including weather, exchange rates, il prices and ecnmic and financial develpments. Plitical uncertainties, primarily in Argentina, culd pse further threat t supply. The gvernment is cnsidering raising exprt taxes n sybeans in an effrt t lwer dmestic fd csts, which culd lead t a new rund f strikes as farmers prtest against lwer prices fr their crps. Fig 14: Cmpeting fat and prtein prices (US$/t) 1,500 1,250 1, Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Palm il Symeal Sy il The cmpeting fat prduct price utlk is mre mixed. Weak demand assciated with the ecnmic dwnturn has driven recent falls in prices. Demand has suffered in a number f cuntries frm the lss f incme grwth. A grwing share f demand fr vegetable ils is prving t be quite price inelastic. Hwever, wrld prductin f palm il will be cnsiderably lwer than expected in the secnd half f 2009 and in 2010 in Malaysia and Indnesia, mainly due t insufficient rainfall resulting frm El Niñ. Wrld palm il stcks are already unusually lw in the key exprting cuntries, but cmparatively high in majr imprting cuntries like India and China. This uncertainty ver fresh supply, cupled with lwer than nrmal stcks is expected t result in a strengthening f il prices int Imitatin cheese Imitatin (r analg) cheese, is a grwing cmpetitr t ingredient cheese, and is an emerging issue fr the Eurpean dairy sectr. This imitatin cheese is displacing cheese predminately in the fast fd sectr, as an alternative cheese tpping fr the pizza industry. The cheaper alternative is made frm vegetable il, casein and varius flavurs and salts. The imitatin cheese is cheaper than natural cheese. Estimates suggest the imitatin cheese usage has surpassed 20,000 tnnes in the EU, which represents less than 1% f the market. 16

17 Australian market The Australian market cntinues t deliver vlume and value grwth, with per capita cnsumptin hlding firm thrugh 2008/09 at arund 300 litres in milk equivalent terms. Vlume grwth has returned in the cheese categry in recent mnths, hwever cnsumers have cntinued t migrate frm branded t private label prducts in the milk categry. Fig 15: Supermarket sales grwth (6 mths t August) Whlesale prices have held firm acrss the range f dairy prducts. Manufacturers have tended t priritise the dmestic market given the dwnturn in exprt returns ver the past 12 mnths. Hwever, there will be sme careful assessment f lcal returns in cming mnths in the face f a strengthening wrld market. Prices in the nn-grcery (fdservice and industrial) sectr have fllwed internatinal cmmdity trends mre clsely than grcery prices, as prevailing supermarket supply cntracts have limited price adjustments. Increases in fficial interest rates may reduce discretinary spending. While this is unlikely t affect the vlume f dairy prducts cnsumed, it may impact n the channel and value f dairy sales as cnsumers seek t ecnmise. This wuld tend t favur increased sales f private label prducts thrugh the supermarket channel, while the fdservice sales and branded prducts are likely t be negatively affected. Fig 16: Whlesale price index ALL prducts Australian cnsumer spending has been supprted by lwer interest rates and stimulus funds. A rising sharemarket has als cntributed t a significant lift in cnsumer and business cnfidence in recent mnths. ABS retail sales data flags a recvery in the fdservice sectr eating ut-f-hme; with grwth in sales thrugh cafes, takeaways and restaurants lifting t parity with the supermarket channel. 17

18 Eurpe In the 2008/09 quta year, ttal milk prductin reached 129 billin litres, which was mre than 4% belw its ttal quta. In 2009/10, milk qutas have been extended a further 1% which prvides rm fr grwth. Reprts suggest prductin is ver 1% in the first 4 mnths f the 2009/10 quta year. Farmers in the nrthern dairy belt are bsting supply in rder t maintain incme levels. New prduct entering interventin stres has almst cme t a halt fr bth butter and SMP. By Octber ver 280,000t f SMP and 83,000t butter had been ffered and accepted fr interventin. The public butter stcks are equivalent t 4% f annual EU butter prductin. The SMP stckpile is mre burdensme as it represents abut 30% f annual EU SMP prductin. There is still n clear plicy slutin fr eliminating the stckpile. 900 Fig 17: Cmbined EU and US SMP Stcks ('000 tnnes) Glbal supply United States US milk prductin has finally dipped belw August 2008 levels. Ttal milk prductin in August was estimated dwn 0.3% frm a year ag, while July prductin was als revised dwn by 0.1%. Strng utput in the Midwest is ffset by steep decreases in the West. The rapid drp in cw numbers cntinued in August, while prductivity natinwide remained abve last year s levels. Prductin is expected t fall further in the remaining few mnths f As Fig 18 shws prductin is trending lwer. USDA frecasts milk prductin t fall 0.8% fr 2009, and a further 0.9% in This may be revised dwn nw that the CWT has annunced plans fr a 4 th herd retirement prgram. 6% 5% Sales f surplus milk pwder t the gvernment have slwed with the stckpile at 220,000t (25% f annual prductin). N sales are frecast fr Fig 18: US year-n-year mnthly milk prductin % 3% 2% 1% 0% 6 mnth mving average 0 Aug-01 Aug-03 Aug-05 Aug-07 Aug-09-1% Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug- 18

19 Australia Natinal milk prductin reached 745 millin litres fr August dwn 1.5%. The first tw mnths f the new seasn are dwn 1.6% n last year. Winter rainfall has been generally satisfactry acrss mst suthern regins althugh it has been t wet in Tasmania, which is causing difficulties with cw health cnditin and culd limit prductin grwth ver the remainder f the seasn. Cnversely, cnditins have been dry and ht in nrthern NSW and suthern Queensland very early in the seasn. Irrigatin allcatins imprved dramatically in Octber, t 29% fr the Murray and 30% fr the Gulburn systems. This represents the highest Octber allcatin fr 4 years. The lwest pening farmgate milk prices fr 5 years mean that many dairy farmers are currently perating at r belw break-even levels, despite falling input csts. Dairy Australia s current frecast milk prductin is fr 9.0 billin litres fr 2009/10, a 4% reductin n last year. New Zealand The New Zealand prductin seasn has started slwly (-2% in first 3 mnths), as prducers have ratinalised feed and fertiliser csts, lwered stcking rates and adjusted t a lwer milk price envirnment. Prductin is current trailing the same perid last seasn. Farmers are still expected t make-up any lst grund nce the seasn gets int full swing. There is strng speculatin that mre mderate t large start-ups are n the cards in New Zealand. This is in additin t the previusly annunced plans t establish milk prcessing facilities. Glbal supply Suth America In the first half f 2009 Argentina s milk prductin was up 5%. Since then, grwth slwed and is reprtedly 3-4% up (t August). This trend is expected t cntinue with full year frecasts f 1% grwth r less. After the wrst drught in 40 years, Argentina has received gd rainfall in mst f the dairying regins. Brazil s milk prductin has cntinued t trail previus year levels all year. Prductin was dwn 4.7% up until the end f July. A milder recessin with a quick recvery acrss the regin will cntinue t keep fd demand at strng levels. Exprts have been extremely limited due t dmestic prices being mre attractive, thereby making the dmestic market the primary fcus. The dmestic market will cntinue t be the primary fcus, but the imprvement in internatinal markets will trigger an increase in exprts. Fig 19: Change in milk prductin (% chg n last yr) 19

20 Inputs Feed grains ABARE s September Crp reprt frecasts a winter crp f 36 millin tnnes up 8% n last year reflecting an imprvement in yields in Victria and Suth Australia, and up 1.2 millin tnnes frm the June frecast. Wheat prductin is frecast t increase 6% t 22.7 millin tnnes (+16% n the 5-year average); barley vlumes are frecast t be up 16% t 7.9 millin tnnes (+1% n the 5-year average). The winter crp frecast by State indicates that vlumes will be up n last year in Victria (+80%) and Suth Australia (+42%); but dwn in Queensland (23%), NSW (-5%) and Western Australia [-4%]. Grain prices are cntinuing t fall due t lwer wrld prices, as nrthern hemisphere harvests are larger than expected. A very strng $A is putting dwnward pressure n lcal prices, and sme excellent rains thrugh sutheast Australia have prvided cnfidence t supplies frm new crps in Nv-Dec Fig 20: Feedgrain prices - $A / tnne Feed grain prices are nw appraching 3-year lws belw half the peak levels f mid With grain prices drpping significantly and a rund f milk price step-ups, the ecnmics f feeding grain t dairy cws has changed markedly ver the past few mnths. Grain prices are currently quite vlatile n small vlumes, s cautin is required n price & quality. Hay In nrthern Victria dairy farmers have swn large areas t cereal crps sme are being grazed regularly but mst being held fr grain fllwing gd September rains. The situatin thrughut central and suth-western NSW remains quite serius, with sme crps having already failed and having insufficient bulk t be cut fr hay. While verall grain supplies in Australia are mre than sufficient, this area f suthern NSW-Riverina is ne f the mst intensive demand regins fr intensive livestck industries - feedlts, pultry, pigs and dairy; s expect strng lcal cmpetitin fr the grain as well as significant grain stck being freighted int the regin. Rain acrss the suthern hay prducing areas has made a big impact n ptential hay prductin. Grain crps that were t be cut fr hay will nw be retained fr grain and hay prductin will suffer. Lack f demand frm dairy farmers is diverting crps frm hay t grain, r plughing in fr green manure. While there is dwnward pressure n suthern hay prices with new seasns hay abut t be delivered, dairy farmers may cnsider buying pprtunities during harvest fr strage and financing f hay frm eager sellers. 20

21 Fertiliser In Australian dllar terms, internatinal prices are nw clse t pre-bm levels. This has been supprted by the nging strengthening f the Australian dllar. The internatinal utlk fr fertiliser prices is fr cntinued weakness at r abut the current level. Lcal pricing resisted the dwnward trend in internatinal pricing frm June thrugh t August, but has started t fall in recent weeks. A Dairy fertiliser mix index is back t where it was tw years ag due t the strng AUD. There appears t be further pprtunity fr falls in lcal prices fr phsphate and ptassium back t internatinal parity levels, whilst nitrgen is expected t stabilise at r arund current levels. It has been ntable that lcal market prices fr cmpsite fertiliser mixtures have been much slwer t fllw dwn the fall in internatinal and lcal prices. Buyers shuld check the cmparative value f these mixtures with an equivalent mix f the basic raw ingredients. Fig 21: Indicative fertiliser prices ($/t) Urea DAP Single super Ptash May09 $590 $850 $380 $1,010 Sept09 $480 $570 $290 $1,000 Dec 09(f) $400-$480 $500-$550 $270-$300 $700-$800 Surce: Xcheque Inputs Water Water trading has increased by 43% n last year in the three mnths t September, fr a ttal vlume f just 3,240 ML at an average price f $365/ML dwn 40% frm $610/ML at this time last year. Water levels in the Gulburn-Murray system in nrthern Victria have increased strngly after gd September rains. The ttal G-M system is at 27% up frm just 13% fur mnths ag and 23% at this time last year. GM-Water annunced large increases in its latest 2009/10 allcatins t the highest 1 Oct levels in fur years, with the Murray system at 29% and the Gulburn system at 30%. The rainfall utlk fr the December quarter has the dds favuring a drier than nrmal seasn acrss nrth-east Queensland, parts f Victria, suth-east Suth Australia and Tasmania. This is nt a particularly prmising utlk fr the key dairying regins. The natinal utlk fr maximum temperatures indicates mderate t strng shifts in the dds favuring higher than average temperatures acrss Australia. Cws Cull cw sales vlumes increased 45% in the first six mnths f 2009, n very lw vlumes in 2008, as farmers held nt cws t take advantage f strng milk prices at that time. The increase was a mre realistic 13% n the six-year average. The rate f sale has slwed markedly in the last tw mnths: +12% and +1% ver August and September respectively. Prices have als sftened, dwn -10% and -17% ver the past tw mnths. 21

22 Exchange rates Vlatility remains a central feature in exchange rates, with n cntractin in the range f Australian dllar frecasts in A Blmberg survey f 34 financial institutins reveals a range f US cents in Thse at the upper end f the range expect significant increases in Australian interest rates, which wuld push the Australian dllar higher, while thse at the lwer end expect a significant dwnturn in the glbal ecnmy. The big fur Australian banks are frecasting the AUD t range between US cents by end The AUD is benefitting frm the resilience f the Australian ecnmy, demnstrated by 0.6% GDP grwth in Q2 2009, driven by steady husehld and business spending. When the RBA begins increasing rates, the first 1% f rate rises culd ccur quickly. By the end f 2010, banks are frecasting a cash rate between 4.25%-4.75%. The RBA cmmenced increasing rates at it s Octber meeting. Fig 22: Exchange rates versus US$ The general weakness f the US dllar against mst majr currencies is prviding supprt t cmmdity prices, by increasing the buying pwer f imprting cuntries, and increasing the ffer prices f exprters. Hwever, in sme cuntries, dairy is nw mre expensive fr cnsumers in lcal currency terms than it was at the height f the glbal cmmdity bm. Russia, Mexic and Krea, have been mst affected, while China has been prtected by virtue f its currency being pegged against the US dllar. Exchange rates are expected t stabilise nce frzen glbal credit markets begin t thaw, but the imprt affrdability index implies demand may suffer in a number f majr glbal dairy exprt markets. The appreciatin f the Japanese yen has magnified the effect f the cmmdity price falls in imprted price terms. Fig 23: Imprt Affrdability Index (SMP) 100 = Feb Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 China Indnesia Japan Krea Mexic Russia 22