a world dairy commodity markets overview - brian...

© Gira 2013 GDC 2013 – EXTRACTS

To thank our interviewees who kindly gave their

time and shared their opinions with us

A World Dairy Commodity Markets Overview

Composed of extracts from the

GIRA DAIRY CLUB 2013

October 2013

© Gira 2013 GDC 2013 – EXTRACTS 2

Thank You Very Much

The following extracts from the Gira Dairy Club (GDC) 2013 are presented in thanks to those who were kind enough to be interviewed by our consultants and to give us their opinions on matters of current interest in the world dairy markets. They are taken directly from the extensive Synthesis volume of the GDC.

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Extracts

The Big Issues in 2012-13 Page 4

Milk production through 2017 6

The dairy commodities, consumption & trade 7

Commodity prices – a chartist approach updated 9

Fresh dairy products in China 17

3


Widespread weather problems in 2012/2013

Severe drought in NZ : the Summer/Autumn drought conditions slashed milk collection by over 1.3 bn litres, as the 2012-13

season came to an end in May. Even with the best prospects for a favourable start to the 2013-14 production season (a third

consecutive bumper spring), calendar year milk collection for 2013 will record a 6.6% drop over 2012, before returning to trend.

Severe drought in the US: after an historic drought in 2012, conditions have improved in 2013 but are uneven among states. Some

areas in the West of the country remain in severe drought compared to the historic average. Feed prices should decrease, which

should improve profitability.

EU: a wet summer in 2012 and a cold spring in 2013

Drought in Russia in 2012

Prices

Feed prices have remained a key concern as the highest feed prices of the last ten years were reached in the second half of 2012

At the same time, milk prices were down in 2012, causing profitability problems for the farmers in the main feed-based producer

countries (US & EU)

On the commodity side, SMP and WMP prices had been increasing steadily from mid 2012 and reached record levels in April 2013

World milk production

World milk production decreased in the first half of 2013 by around -2%, but the trend appears positive for the five years ahead,

with milk production expected to increase by 2.2% p.a. between 2012 and 2017. The production and consumption of the five dairy

commodities studied should follow the same trend, increasing together at 2.3% p.a. over the same period

Intensive Merger & Acquisition activity in 2012

In 2012, the leading dairy companies carried out several major acquisitions

2013 has seen less opportunities for acquisitions. Most leading companies are now targeting organic growth and launching

ambitious investment plans in their existing facilities.

THE BIG ISSUES in 2012/3

4


THE BIG ISSUES (2)

Strong indications that the world’s dairy industry is at a turning point

It appears very much that the world’s dairy supply chain is now at a turning point:

We are still in a Sellers’ Market, but for how much longer? There are already signs of levelling off and of substitution. Segmentation

and added-value will become the order of the day as we head (slowly) into a more price-competitive market.

The step-increase of milk price paid to farmers in importing countries post 2008 appears to be holding

• Many of these countries’ milk prices have reached a (much) higher level than in the EU and the US

• In several countries, this will accelerate the growth of local production and supply-chain (re)structuring

• In conjunction with a push for up-stream efficiency which will primarily come from the dairy processors themselves (a never-before seen trend)

• The impact of the resulting economic model is still largely unforeseeable

Foreign companies are starting to invest seriously in emerging markets in SE Asia and China (and even Africa), thus ensuring future

markets for their products and developing added value through B2C (FrieslandCampina, Arla, Danone – Alaska, Mengniu, Yili…)

But at the same time Chinese dairies are investing in processing abroad, to secure volumes and quality for their domestic market

Substitution will grow as suppliers are not able to produce enough dairy ingredients at a "reasonable" price. Demand is exceeding

production. FFMP growth is already an important example of this trend.

Sustainability is starting to be more than just a buzz-word. Whatever it is, it is becoming a commercial prerequisite for many end-users

Real commercial advantages for exporters will come from new FTAs and agreements: NZ/China, India/NZ, EU/USA, TTIP, ASEAN, …

The end of quotas in the EU will be important, although its impact still remains far from clear. It may still be a turning-point for the

recovery of European dairy production – even challenging NZ’s export supremacy. And EU milk prices are now relatively “cheap”…

The awakening of the US as a dedicated exporter: there is a strong possibility of quite slow but long term export growth, built on milk

production growth, a competitive milk price and a much more structured export effort.

5

Having survived a year of major weather problems across all the key dairy regions, and of record high feed and

commodity prices, all operators are learning how to navigate in new waters. This will stand them in good stead for the

future, since although the sky is decidedly blue ahead, the boat is moving fast and the waves will get higher.


Milk Production – growth Sustained growth in almost all GDC countries

6

The major growth in 2012 to 2017 is set to take place in the following countries:

The highest growth in volume terms will happen in: India (30.2 mio t over the whole period), China (9.8 mio), US (7.6 mio), Brazil (4.0 mio) & EU (4.1 mio)

Russian and Japanese production is expected to decline by 1.1 mio and 0.5 mio tons respectively through 2017.

Milk Production Change by GDC Country,

2007-2012

Continuous growth in almost all countries

From 2007-12, the average annual growth was 1.8% p.a.

The main growth in 2007-12 took place in just a few countries, notably: India (19.3 mio t over the whole period), China (8.0 mio), US (6.7 mio), NZ (5.4 mio) & EU (5.1 mio)

550,000

560,000

570,000

580,000

590,000

600,000

610,000

620,000

630,000

2012 EU RU BL UA US MX AR BR VE NZ AU IN** CN JP ID MY PH VN TH EG SA DZ2017f

('000 t

on

s o

f m

ilk)

Source: Gira - **IN: includes cow & buffalo milk

490,000

500,000

510,000

520,000

530,000

540,000

550,000

560,000

570,000

2007 EU RU BL UA US MX AR BR VE NZ AU IN* CN JP ID MY PH VN TH EG SA DZ 2012

('000 t

on

s o

f m

ilk)

Source: Gira - **IN: includes cow & buffalo milk

Milk Production Change by GDC Country,

2012-2017f


Global Commodities Consumption EU largest consumer of the five commodities; good growth elsewhere

The 5 Commodities together – Global Consumption ('000 t product weight), 2012

Europe is still the main

consumer of dairy

commodity products.

However, future EU

consumption growth is

unlikely to be as strong

as other areas of the

world

Including: cheese, butter, WMP, SMP, & standard whey powder

EU12,89735%

US7,27720%

IN4,25512%

CN2,4117%

BR1,6244%

RU1,4914%

MX8952%

JP6932%

AR6722%

AU5101%

UA4911%

EG4681%

ID3951%

SA3901%

DZ3571%

Others*1,5184%

Source: Gira and FAO/OCDE* Others = IR, VE, VN, MY, TH, PH, BL, NG, NZ


Major exporting countries

Trade flows in ‘000 t

100

160

200

600

Summary of main (GDC) Dairy Commodity trade flows, 2012 Only individual flows of over 100KT are shown here

Products included here:

WMP, SMP, Cheese,

Butter & AMF, Whey

Powder

8


Commodity Prices

The roller-coaster continues, but becomes clearer

9


Tracking Prices And trying to make some sense out of them

The very relative coherence of price movements across the whole commodities spectrum – more or less valid

through 2011 – is now a thing of the past.

Increasingly now, only “obviously” related commodities move together, but those links seem to getting stronger

again…

10


Links between related commodities’ movements appear to

have strengthened more recently

EU and US milk prices come together again as the links to & between dairy commodities strengthen

The speculative money seems (again) to be flowing equally into the main speculative commodities: oil, wheat

and gold. But they no longer appear to influence dairy

Palm Oil seems largely uncorrelated with dairy.

The links (R²) between

different parts of the

dairy chain appear to

have strengthened

further recently (green

bars here)

11


Links between dairy commodity movements have

strengthened recently, & prices have again come together

Each of the last four (including 2003) strong upward price movements has been preceded by a coming-

together of the commodity prices.

We have just seen another one – is it going to be a repeat of 2010? Or will it be the proof that it’s all just by

chance…?

?

12


The dairy commodity market is showing signs of

becoming a more mature, liquid market

During GDC12, we remarked on the appearance of floor resistance lines on our commodities price charts –

for all 4 basic commodities and on most quoted markets:

? ?

Looking back to 2002, we established that there was probably a floor resistance level…

one whose slowly rising trend reflected demand and/or cost inflation.

The question at that time was whether the then current prices would fall to that line (or even below), or bounce

upward earlier.

There were also other lines, but it was too early, or too silly, to project them forward

And there was no sensible ceiling resistance line visible.

13


Another year – we’re a little bit wiser,

and the “charts” appear to be a little bit clearer

In fact, the line of downward resistance held well this time last year, and prices shot up again, to the levels of 2008

and 2011.

Indeed, it is this third top of the cycle that makes us believe that there is a real price “ceiling” in formation… i.e. a price above which buyers stop buying. And it’s pretty flat, i.e. it doesn’t appear to be affected by demand or cost inflation.

14

However, if, as it seems is the case, the downward support floor continues to rise, then this could imply that, in the

future, prices might be trading within a more limited, but higher range than until now.


Other related commodity markets appear to be more

established and mature (flat…)

But the CME cheddar support floor

has also been rising in recent

years, as has the EU butter price (black dotted arrow on the two graphs)

So these markets might also be

trading within tighter limits.

15


Fresh Dairy Products in China


Chinese dairy consumption was small & limited to long life

products… but now the “fresh” taste has been awoken!

Fast evolving Chinese fresh demand

But still limited to basic products… & the major urban centers

Traditional fresh demand was only near to the traditional dairy herds

Very limited in both volume & product range

For fresh milk & some limited natural yogurt

Lack of chill-chain prevented fresh product development

Otherwise dairy is essentially limited to UHT milk & powders

UHT is defined as “fresh”… this protects domestic milk producers from

competition from imports for liquid milk reconstitution!

Yogurt

Was a fresh, locally supplied, largely artisanal product

Development of the chilled supply chain has opened the market to

commercial supply

Now we see yogurts that are: imported, of Chinese origin… and even

imported brands made in China

Ice Cream is the major new product

Frozen distribution is still more reliable

New and sexy… especially for younger generations

Imported brands as well as domestic brand development.

17


UHT milk category is well developed… but now being superseded

UHT is defined as a “fresh” category

Domestic production well

established, but not trusted by

consumers (since the melamine & subsequent

scandals)

The import category now dominates

More expensive

Imported using back-freight shipping

advantages

Available also in small cartons,

multi packs

Suits local consumption.

18


Pura,

from Australia,

RMB49.20

($8.00)/ lt

1, from South

Korea

RMB38.80

($6.31)/ lt

2, from South

Korea

RMB34.80

($5.66)/ lt

Asahi

(Japanese), from

single farm,

RMB25.80

($4.20)/ lt

Beijing San

Yuan, base

option,

RMB11.50

($1.87)/ lt

$6.57/lt spread for premium

Air Freight (a new sector) Local Production UHT

Mengniu,

LOCAL base

UHT,

RMB8.80

($1.43)/ lt

Arla,

EU

top UHT,

RMB19.90

($3.23)/ lt

Food fears & affluence translate into real profit margins

19

Real fresh milk is now available – but at what price!


Ice cream One of the major growth categories

The Western image of ice cream has boosted demand with younger generation, helped by fashionable

import brands, e.g. Haagen-Dazs

Chinese branded ice cream has developed alongside western imports

But it lacks the kudos of import brands… even when they are made in China

Example: New Zealand ice cream manufacturers who cannot meet NZ domestic demand due to export commitments!

Demand has historically been for out-of-home consumption, but now retail options are developing fast.

20


Yogurt An old category, with new potential

Some limited traditional

consumption

In reusable earthenware jars

Consumed close to production

Developed import production

Some use of reconstitution

Fast evolving into a premium

product

Imported and local premium brands

JV with major Global brands

21

What’s driving increased Consumption?

Easier for those with lactose intolerance to digest

Consumer appeal

• Functional yogurt (health)

• Drinking yogurt (convenience)

Development of Ambient yogurt aids distribution

• Momchilovtsi by Bright Food, Just Yoghurt by Mengniu,

etc.


Cheese The market has just started moving

Relatively limited demand, mainly from: returned overseas Chinese, foreign residents in China, children, etc.

High and increasing demand in foodservice (McDonald’s, Pizza Hut…).

Acceleration of the development of Pizza Hut in China : 625 restaurants at the end of 2011 and more than 800 at the end of

2012

For the moment, « New World » cheeses prevail over European style cheeses.

22

Milkana attracts Chinese children

Chinese consumers have adopted the

wine… so why not the cheese ?

- Western style of life, health, safety…


Evolving dessert consumption model Huge opportunities for dairy based products

Specialised desserts restaurant

Meeting places, mainly students and young

people as clients… with long queues

Seen as highly fashionable.

23

Fresh milk bar

Products : pasteurized milk, yoghurt, ice-cream,

milk shake, cheese, milk tea, iced coffee…

Made from fresh milk directly supplied by the local

farms.


Please feel free to contact us for any information

on the full report of the Gira Dairy Club 2013

Christophe Lafougère

[email protected]

or

Rémi Valençot

[email protected]

Website: www.girafood.com

Proposal of the GDC 2013

24

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