Dairy Globalization Refresh: 2011 Update Summary Findings

Transcription

1 Dairy Globalization Refresh: 2011 Update Summary Findings Commissioned by Dairy Management Inc. & U.S. Dairy Export Council Conducted by Bain & Company

2 Background Study conducted by Bain and Co. in collaboration with industry participants Funded by USDEC using check-off funds on behalf of Dairy Management Inc. and the Innovation Center Globalization programs managed by checkoff staff with leadership from producers and processors 2

3 Study background, purpose Initial study examined implications of globalization But since then, industry has endured rollercoaster of economic cycles So do basic conclusions of original study still hold true? Have supply/demand changed to shrink demand gap identified in earlier study? Has the U.S. window of opportunity shortened through the entrance of new suppliers? Is program still viable to assist U.S. industry to become a globally consistent supplier? 3

4 In 2009, we identified several trends impacting the outlook for global dairy Dairy demand will continue to grow rapidly in developing markets Dairy supply will be challenged to keep pace United States is positioned to become a much larger player, but must address weaknesses A latent demand gap is developing, creating a sizeable, though finite, window of opportunity for the United States 4

5 and recommended 7 industry and company-specific initiatives Reform U.S. pricing and risk management policies Increase access to international markets Improve responsiveness to global demand 1. Reform regulated milk pricing and price support mechanisms (IDFA, NMPF) 2. Better mechanisms for risk management, volatility reduction 3. Trade treaties that provide net export benefits (USDEC, IDFA, NMPF) 4. Pre-competitive sales and marketing investments and capabilities 5. Food safety assurances and traceability 6. Customer product specification requirements, globally 7. Product and technology innovation 5

6 The chosen outcome was for U.S. dairy to pursue actions that would make us a more Consistent Supplier Fortress USA Status Quo Consistent Supplier Recommended by IC Board Commitment to global opportunities Improve commercial focus, product portfolio Reform FMMO, price support Improve forward contracts, futures markets Strong domestic market as basis for global trade Build insight/capability 6

7 A refreshed view of dairy fundamentals shows export opportunity still exists Import demand Long-term demand will remain strong, driven by emerging markets Export supply Traditional supply sources are constrained and will fall short of expected demand Buyer feedback Have affirmed United States is well-positioned but improvements needed Long-term outlook Demand gap wider than anticipated, window of opportunity remains open with U.S. as the likely source But efforts still needed (pricing/supply flexibility, volatility, commercial focus) 7

8 Forecasted growth remains strong in emerging markets Dairy consumption is expected to grow quickly in key emerging markets from which ~75% of new dairy consumption will come PROJECTED GROWTH IN WORLD NON-FLUID DAIRY CONSUMPTION ( ) Source: Projected growth for India, Mena and SE Asia from FAPRI (2011); projected growth for China based on Bain analysis derived from OECD (2010) and GDP/consumption regression analysis 8

9 China: Despite foreign investments, domestic dairy farms unlikely to overcome demand gap At most, Fonterra farms will add a fraction of total production FONTERRA SHARE OF CHINA DAIRY HERD / RAW MILK PRODUCTION Additionally, they are likely to price at a premium FONTERRA EXPECTED PRICING SCHEME VS. AVERAGE MARKET PRICE ($/cwt) Source: Fonterra benefits from Chinese dairy market, stuff.co.nz (4/14/2011); Fonterra to invest in two more farms. Fonterra media release (2/2/2010); Bain analysis; Expert interviews 9

10 China: Even with production growth, likely to rely on imports to meet growing demand CHINESE NON-FLUID DAIRY CONSUMPTION (FORECASTED) CAGR % 7% Average 6% Source: Fonterra benefits from Chinese dairy market, stuff.co.nz (4/14/2011); Fonterra to invest in two more farms. Fonterra media release (2/2/2010); Bain analysis; expert interviews 10

11 More on demand and other import markets (1) Import markets China Net imports: 486K MT, 11% of global SE Asia Net imports: 777K MT, 17% of global Russia Net imports: 658K MT, 14% of global Legend What has changed since 2009 Dairy consumption growth has increased and promises sustained growth over the longer term as economic development moves inland and 200M more Chinese join the middle class Production took a big hit from melamine crisis in 08-09, widening China s demand gap. Current industry structure makes large production increases unlikely without major investments in large, industrial farms Ongoing quality issues and lack of trust in domestically produced products create near-term opportunities to boost imports China will continue to be a net importer over the long term, but government tightening of import documentation requirements may create difficulty for U.S. imports Although milk production increased faster than expected, local production still covers <10% of consumption SE Asia remains a sizeable importer of dairy products with strong potential for consumption growth Production dipped during due to droughts, high temperature and high-feed prices, widening demand gap Future production unclear due to recent instability in milk production and shifting government policies Consumption growth slow due to a declining population Russia expected to remain major dairy importer despite government efforts to encourage domestic production and stricter documentation requirements (effectively blocking Ukrainian and U.S. imports) Impact on demand gap: Bigger gap Small change Smaller gap Est. impact, 2013 demand gap Note: Net import figures as of

12 More on demand and other import markets (2) Import markets What has changed since 2009 Est. impact, 2013 demand gap Mexico Net imports: 299K MT, 7% of global MENA Net imports: 519K MT, 11% of global India Net imports: 20K MT, 0.4% of global Consumption still growing and expected to continue with stable economic growth. However, rising concerns over obesity may shift consumption toward lower-fat products Despite faster production growth, Mexico projected to remain a significant importer through 2015 and beyond Mexico extended retaliatory duties to U.S. cheese in late 2010 but recent progress on trucking dispute may restore trade levels As a group, Algeria, Egypt and Saudi Arabia are significant dairy import markets, collectively importing more than China in 2010 Production growing slowly, but not sufficient to cover domestic needs, and water/ forage limitations will constrain future growth Unrest across the region threatens near-term economic growth, though political reforms may also lead to significant long-term upside for economic (and therefore, dairy) growth Supply has failed to keep up with domestic demand due to bad weather hampering production and continued growth in consumption Near-term consumption expected to outpace production despite government s encouragement of selfsufficiency Imports have increased by small amount to fill demand-supply gap, with similar opportunities expected in near term Production has large potential to improve and should grow with government s National Dairy Plan Although currently inaccessible to U.S. exporters, India s growing imports will create opportunities for the US elsewhere in the world Legend Impact on demand gap: Bigger gap Small change Smaller gap Note: Net import figures as of

13 New Zealand: Constrained by several factors, dairy land growth should reach peak by 2020 Dairy land likely to grow slowly beyond 2015 and peak around 2020 DAIRY LAND (M Hectares) 2.1% CAGR it 1.2% CAGR it it 0.8% CAGR Several factors are expected to constrain further land growth beyond 2020 Most dairy land growth/ conversion on South Island, where good land in demand Environmental regs expected, limited land/herd growth Irrigation of marginal land on South Island also limited due to regs and water supplies Source: LIC Dec 2010, Dairy NZ, USDA GAIN Nov 2010; Lit. search, Bain analysis 13

14 Some European Union countries will expand production, while others will be flat to down Elimination of quota will lead to modest expansion of ~5% PROJECTED GROWTH ( ) Bar width proportional to country s share of EU production % of total EU cow milk production Countries most frequently mentioned by experts as likely to experience strong growth Source: European Commission, Economic Impact of the Abolition of the Milk Quota Regime (2/2009); Eurostat (for 2010 country-level production) 14

15 More on supply and other export markets (1) Export markets New Zealand Net exports: 1997K MT, 41% of global Australia Net exports: 390K MT, 8% of global EU Net exports: 1419K MT, 29% of global Ukraine Net exports: 64K MT, 1% of global Legend What has changed since 2009 Production grew faster than expected during due to cow population growth. Consumption slumped in due to soaring prices, adding to export growth Future production growth expected to slow; could reach peak level of 23M MT by 2020 Despite higher production, will not produce enough milk to close latent demand gap Production took a hit due to droughts, floods. Water table has improved, should spur limited production growth Consumption growth will remain flat, will remain a large exporter, albeit with slow production growth and limited ability to expand Consumption slumped in as high prices were followed by recession and added to export growth; consumption growth expected to remain low Quotas increasing 1% annually ; aggregate EU-27 production could increase by 5-8% from 2010 to 2020 Production growth most likely result of a step change in output at 2015 by some countries as they expand production to use the full potential capacity of existing farms After 2015, further growth will be constrained by environmental regulations and the steep incremental investments required to expand the industry Production lower in than previously projected due to financial, policy and quality issues; future export growth dependent on addressing these issues Consumption growth also slowed due to high prices and a weak economy Growth still possible, though unlikely to be a major exporter in the near term Impact on demand gap: Bigger gap Small change Smaller gap Est. impact, 2013 demand gap Note: Net export figures as of

16 More on supply and other export markets (2) Export markets Brazil Net imports: 48K MT, 1% of global Argentina Net exports: 247K MT, 5% of global Belarus Net exports: 312K MT, 6% of global U.S. Net exports: 322K MT, 7% of global Legend What has changed since 2009 Brazil became a net importer as production fell mainly due to poor profitability and bad weather Consumption continued to increase, spurred by income and population growth Should return to small net exporter by Still has strong exporter potential in the long term Downturn saw production and consumption growth, but exports continued to grow off a small base. Still a relatively small exporter with decent growth potential, despite protectionist policies Improved dairy-grain price ratio should encourage use of feed and improve cow yields Industry dependent on demand from Russia, but exports have grown at a very strong pace Poor economic situation will limit consumption growth and limit government ability to invest in production, though production has shown strong potential Exports are starting to diversify to markets other than Russia Global recession, slow reaction of U.S. trade policy and period of high-feed prices could lead to a less competitive U.S. dairy industry Production and consumption trends remain steady with slow growth expected through 2015 Impact on demand gap: Bigger gap Small change Smaller gap Est. impact, 2013 demand gap Note: Net export figures as of

17 Feed prices have risen quickly over the past decade HISTORICAL COMMODITY PRICES (indexed at 1983) Product Change Change Wheat -27% 126% Soy Bean -33% 111% Corn -34% 104% Source: Bloomberg (2011) 17

18 Dairy producers will almost certainly face high feed costs (relative to the previous 20 year average) Sustained high commodity prices also likely AVERAGE COMMODITY PRICES (cents/bu) Producers and processors should reassess their cost structures to ensure competitiveness over the longer term Source: EIU (2011), Bloomberg (2011); Bain analysis 18

19 High feed prices not likely to shift U.S. cost position; major expansion will be costly for most competitors Despite higher feed prices, the U.S. should maintain its cost position. And, even for traditionally lower-cost producers, major commercial growth will be costly. RAW MILK ESTIMATED MARGINAL PRODUCTION COSTS ($/MT) Costs based on IFCN large-sized farms Range of potential marginal commercial costs New Zealand marginal costs include cost of shifting to 100% feed after peak production is reached under grazing model U.S. Netherlands China New Zealand Source: IFCN 2010; USDA 2009; China Dairy 2010; Teagasc Ireland Dairy 2010; The Wealth Report (2011); Eurostat (2011); expert interviews 19

20 Currency was also considered as a wildcard, but it is unlikely to have a near-term impact on U.S. dairy PROJECTED USD APPRECIATION/DEPRECIATION VS. KEY IMPORT CURRENCIES (10-13F) Currency trends may influence long-term cost position of suppliers while also boosting purchasing power for importers However, currency fluctuations unlikely to drive purchases in the short-term because buyers more likely to manage through hedging Even with strong U.S. dollar, latent demand gap will still exist, making export pricing levels more attractive Source: EIU (2011), Bloomberg (2011); Bain analysis 20

21 In summary, the window of opportunity remains open and appears to be expanding Net 2013 demand gap widened during the global economic downturn IMPORTERS China Russia Southeast Asia, Mexico, MENA, India EXPORTERS Brazil Ukraine New Zealand European Union Australia, Argentina, Belarus Latent demand gap of 6.5-7B lbs. still exists, may be larger than estimated China shows continued growth in demand Russia production dipped Potential low-cost producers such as Brazil, Ukraine recently stumbled New Zealand and EU, despite modest increases, unable to fill demand gap Other sources Argentina and Belarus have good potential, but still relatively small 21

22 And buyers have clearly affirmed that the U.S. is wellpositioned to play a greater role Buyers view the United States as an important source of future supply We desire to open our portfolio and expand our supplier base beyond Fonterra. I would like to have the United States as a supplier and they are a natural choice. The United States has one very big strength. They have a lot of milk with no seasonality. Source: Innovation Center for U.S. Dairy Global Dairy Buyer Survey, conducted in September 2010 but want the United States to commit to the global market We are afraid to contract with the United States because we can t ensure that they will meet the commitment. That means I have to bear the risk. Supply is uncertain they want to play when price works but we can t be sure they will be there. It works for spot buys, but not for consistent, twice-monthly deliveries. We need suppliers who are committed. 22

23 Though the window of opportunity will remain open, the U.S. must take action in near-term POTENTIAL LONG-TERM U.S. TRAJECTORY High U.S. DAIRY COMPETITIVENESS Low TIME HORIZON NEAR-TERM Dairy trade continuously attractive Buyers seek to rely more upon United States as an alternative supplier MID-TERM Growth markets continue to import New Zealand approaches peak production levels, inducing a need for alternative suppliers Low-cost suppliers emerge LONG-TERM Today s emerging markets see slower growth rates Low-cost exporters expand capacity 23

24 However, there are reminders that the window of opportunity won t remain open indefinitely Import demand Export supply Policy reforms 1. Major importers have renewed investments in domestic production 2. Recent willingness to protect local producers may give domestic producers time to increase their competitiveness 3. Oceania and EU aggressively pursuing FTAs with developing countries 4. Long-term growth likely for some EU producers such as Ireland and Netherlands 5. Brazil, Argentina, Ukraine and Belarus hold potential 6. The United States has yet to make key reforms 24

25 Policy reform should seek to accelerate achieving critical outcomes U.S. dairy is uniquely positioned to seize on long-term export growth Global dairy demand continues to outstrip supply due to growth in developing markets Updated dairy policies are needed before the U.S. can fully benefit Reform milk pricing systems to improve the forward/ futures market to manage price volatility Export markets are the strongest source for future U.S. growth The U.S. can become a sustainably larger player provided it can address capability gaps Global buyers want a more diverse supply base Yet, emerging suppliers make this a finite window Reform price support to remove the government as a last resort buyer and remove disincentives for product innovation Develop better mechanisms for risk management to mitigate the impact of volatility Modify standards of identity closer to global norms if needed to meet customer needs The reforms, whatever their details, must enable key outcomes Flexible pricing to let milk flow to the best/ most profitable use Achieve greater predictability of price thereby decreasing the cost of volatility Let market incentives better align product portfolios with customer needs Achieve value growth for producers and processors by investment in innovation, safety and quality 25

26 Failure to achieve needed policy change will weaken the U.S. industry and limit its higher value realization The U.S. will miss out on sustainable volume and value growth Unmet demand will accelerate the expansion of other producers The U.S. industry will see lower competitiveness and less ability to meet market needs Limited opportunities for U.S. to grow milk supply and raise on-farm margins without global trade Greater value and profits will be available as emerging markets expand consumption capturing this value is a priority for every expanding industry Stagnant industry will undermine competitiveness, investment and profit for entire sector Failure to fulfill rising demand will incent investment in alternate areas of supply, accelerating their emergence as global competitors Without the U.S., investors and buyers must turn to higher-cost sources such as the EU and lead to a closing window of opportunity Lack of higher growth outlets will dampen capital investment in the U.S. supply chain, leading to declining competitiveness The impact of volatility will increase, further damaging the industry, encouraging substitution by non-dairy alternatives Without a policy and economic environment that facilitates the growth and advancement of the U.S. dairy farmer, filling the latent demand gap could be out of reach 26

27 Concluding thoughts and implications The 2011 refresh confirmed the findings of the 2009 report we re on the right track Opportunity is still there, but we have a limited ability to control the size of the prize What we can control is time how quickly we move into this space Window of opportunity won t stay open indefinitely The U.S. has yet to make key reforms needed to fully capitalize on the opportunity If the U.S. doesn t make key reforms, we will miss out on sustainable volume and value growth; unmet demand will accelerate the expansion of other producers; and the U.S. industry competitiveness will erode 27

28 The same industry and company efforts will combine to make the U.S. a globally consistent supplier High Risk Management, Volatility Milk pricing reform Priority Cross-border partnerships High-value products meeting international standards Customer Product Specifications Product & Technology Innovation Sales / marketing capabilitiesities Quality- Traceability (Safety) Net benefit trade treaties Low Company specific Export Marketing Board Collective industry 28

29 Online access to the study usdairy.com/globalization Executive summary Factbase White Paper 29

30 Dairy Globalization Refresh: 2011 Update Summary Findings Commissioned by Dairy Management Inc. & U.S. Dairy Export Council Conducted by Bain & Company