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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)
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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
