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  • Dairy Globalization Refresh: 2011 Update Summary FindingsSummary Findings Conducted by Bain & Company C i i d b D i M t I & U S D i E t C ilCommissioned by Dairy Management Inc. & U.S. Dairy Export Council

    FINAL June 21, 2011

  • Globalization Task Force

    Kevin Toland, Glanbia (Chair) Dermot Carey, Darigold, Inc.y, g ,Kimberly Clauss, Hilmar Cheese Company Richard Cotta, California Dairies, Inc. Les Hardesty, USDEC Chairman Jeff Kaneb, HP Hood LLC

    C l Kit h L d O'L kCarol Kitchen, Land O'LakesKeith Murfield, United Dairymen of Arizona Steve Shelley Schreiber FoodsSteve Shelley, Schreiber FoodsSue Taylor, Leprino Foods Jay Waldvogel, Dairy Farmers of America

    1

  • Agenda

    Introduction/Executive summary Updated view on supply and demand Potential wild cards Summary and recommended actionsSummary and recommended actions

    2

  • In 2009, we identified several trends impacting the outlook for global dairy

    Dairy demand will continue to grow at a rapid pace in developing markets

    Dairy supply will be challenged to keep pace Slow growth in Oceania/Europe

    B il Uk i t Brazil, Ukraine years out China will remain an importer

    The global dairy trade is the primary source of growth for U S dairyThe global dairy trade is the primary source of growth for U.S. dairy, and the U.S. is positioned to become a much larger player, but

    must address weaknesses

    A latent demand gap is developing and creating a sizeable, though finite, window of opportunity for U.S. dairyg , pp y y

    3

  • and recommended 7 industry and company-specific initiatives

    Reform U.S. pricing and risk

    management

    I. Reform of the regulated milk pricing systems (Federal and State) and the price support mechanisms

    II. Development of better mechanisms for risk management and

    Increase access

    management policies

    reduction of volatility

    III. Continued pursuit of trade treaties that provide net exportto international

    markets

    III. Continued pursuit of trade treaties that provide net export benefits

    IV Analysis and prospective redirection of industrys global pre

    Improve responsiveness

    IV. Analysis and prospective redirection of industry s global, pre-competitive sales and marketing investments and capabilities

    V. Build on existing food safety assurances and traceability as a competitive strength p

    to global demand VI. Develop better ability to meet customer product specification requirements globally

    VII. Encourage increased product and technology innovation

    4

  • The desired outcome was for U.S. dairy to become a Consistent Supplier to the global market

    Fortress USA Status Quo Consistent Supplier Global Dairy

    Player

    Complete focus on domestic market

    Use of additional tariff and non tariff barriers to

    Limited industry efforts to address globalization

    Current policies and regulation

    Commitment to global opportunities for U.S. milk supply

    Broad efforts to improve

    Consistent exporter strategy, plus:

    Industry moves to an t f d d land non-tariff barriers to

    overcome foreign competition

    Supply mgt. as a means to balance production

    regulation

    Opportunistic participation in global trade as prices allow

    Individual companies

    Broad efforts to improve commercial focus and align product portfolio

    Collective effort to reform FMMO and price

    export focused model that includes milk supply and processing assets outside of U.S.

    Commercial and and demand, and limit volatility

    Attempt to limit effects of globalization

    Individual companies may choose to develop differentiated export capabilities

    Limited effort to manage

    support Efforts to improve

    forward contracts, futures markets

    Strong domestic market

    innovation capability development

    May include off-shore investment and other significant effortsvolatility Strong domestic market

    as a basis for global trade

    Joint industry efforts to build insight/ capability

    significant efforts

    Capabilities will support domestic market, though investments may be diverted globallyg y

    5 Recommended

    by IC Board

  • Since then, however, the global downturn significantly impacted the dairy industryp y y

    During the downturn, global trade slowed

    stalling production growth and driving down prices

    YoY net global trade Global raw milk World dairy prices(USD/MT)

    6

    8%

    ggrowth (by weight)

    6.2% 400

    500M MT

    production

    458 455

    Decline

    $6,000

    (USD/MT)

    4

    6

    2 3%

    200

    300

    -1%

    2,000

    4,000

    Butter

    Cheese

    SMP

    WMP

    0

    2

    2008 2009

    2.3%

    0

    100

    2008 20090

    06-07 07-08 08-09

    Note: Global raw milk production refers to 27 key markets S FAPRI (2011) IDF (2010) ABARE (2011)

    The financial crisis in the global economy caused international demand for dairy produce to decline in late 2008 and had a dramatic impact on product prices during the first half year of 2009the financial crisis impacted every aspect of the dairy business: production, trade, consumption and prices.

    International Dairy Federation, The World Dairy Situation (2010)

    Source: FAPRI (2011); IDF (2010); ABARE (2011)

    6

  • And although these trends have largely reversed, key questions remain

    Demand is picking up and prices have recovered

    What (if anything) has changed about the outlook for dairy? How might these changes impact the Consistent Supplier strategy?

    S FAPRI (2011) ABARE (2011)Source: FAPRI (2011); ABARE (2011)

    7

  • To answer these questions, the Innovation Center commissioned a globalization refresh

    Project objectives Determine if globalization trends have substantively changed Agree on which changes could materially affect the primary conclusions of the original study Assess any expected change to the duration of the window of opportunity facing the U.S. dairy industry Synthesize updated findings to determine potential impact on the U.S. dairy industry, the Consistent Supplier strategy and the recommended industry initiatives derived in 2009industry initiatives derived in 2009 Communicate the findings of the project to key dairy stakeholders and constituentsconstituents

    8

  • Agenda

    Introduction/Executive summary Updated view on supply and demand Potential wild cards Summary and recommended actionsSummary and recommended actions

    9

  • Executive summary: a refreshed view of dairy fundamentals shows export opportunity still existsp pp y

    Long term demand for dairy products will remain strong, driven primarily by emerging markets (with China remaining a net importer)

    Import demand

    Traditional sources of supply are constrained and will fall short of expected demand, although Europe and New Zealand may expand output more than originally anticipated

    Brazil and Ukraine stumbled in recent years and Argentina and Belarus have yet

    Export supply

    Brazil and Ukraine stumbled in recent years and Argentina and Belarus have yet to emerge as major global players

    Buyers desire an alternative source of supply and have affirmed that the U.S. is well-positioned to meet this need, but the U.S. still has clear areas for i t

    Buyer feedback improvementfeedback

    The demand gap is likely to be wider than anticipated, the window of opportunity remains open over the long term and U S dairy is the primary source of supply toremains open over the long term, and U.S. dairy is the primary source of supply to satisfy that demand

    However, company, industry and policy efforts to increase pricing and supply flexibility, reduce the impact of volatility and improve commercial focus are still necessary

    Long-term outlook

    necessary

    10

  • And, the export market can provide value to U.S. dairy beyond what is available domesticallyy y

    Available export prices exceeded U.S. actuals for much of the last

    two years

    and U.S. prices have benefitted less than those in New Zealand two years

    S USDEC l b li ti t i F t A l R t F t M di R l NZX A if M thl D i R t

    11

    Source: USDEC globalization metrics, Fonterra Annual Reports; Fonterra Media Releases; NZX Agrifax Monthly Dairy Reports

  • Import markets: estimated change in demand gap (1 of 2)g g ( )

    Chi D i ti th h i d d i t i d th th l t

    Note: Net import figures as of 2010

    Estimated impact on 2013 latent demand gap

    Bigger gap

    Small change

    Smaller gap

    Impact on demand gap:

    What has changed since 2009

    China (Net imports: 486K MT, 11% of global)

    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 Chinas 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 g g q y y p popportunities 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

    SE Asia (Net imports: 777K MT

    Although milk production increased faster than exp