London 27 June 2011

Mark Voorbergen

Food & Agribusiness Research and AdvisoryRabobank International

Global developments in dairy- Implications for the UK dairy value chain

Contents

Section 1:

Section 2:

Global dairy market developments

Considerations for the UK dairy chain

Global demand growth is not driven by the Western world

• World market returns to an annual

growth rate of 2.5%

• Mostly driven by demand growth in

net importing regions

• Growth in the Western world is

mainly about value growth:– Product innovations targeting

health and wellness

– Convenience, snacking

3

Supply security has become an issue

• In 2010, China became the nr 1 importer of dairy in the world.

Majority of imports originate from New Zealand. Supply

concentration is a risk

• Large dairy buyers are changing their sourcing strategies (value

chain investments, jv’s with suppliers, less spot market buying)

• Entire value chain is looking for stable long term pricing structures

4

Returns on the global market are becoming more appealing

5

Traditional price premium for EU and US milk is declining

Global market moves to higher trading range

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

US

D/

litr

e e

qu

ivale

nt

Premium for US milk over NZ milk

Premium for EU milk over NZ milk

Market has become very volatile

• International prices pushed back to extreme highs in 2011

• Supply issues created the first spike in 2007/08

• The 2011 price developments are mainly caused by very strong import demand

Non dairy players creeping in

Christchurch

New Delhi

Mexico

City

New York

Sao PauloSydney

Singapore

Mumbai

Melbourne

Utrecht

Shanghai

Buenos Aires

London

Non dairy players creeping in

What’s driving new entrants?

Pull

Push• Health trends/risks of current product portfolios• Rising retail power• Anti-trust limitations

Synergies /

Synchronicity

• Processing, packaging, distribution• Overlap with juices, functional foods• Desire to expand in developing markets

• Dairy growth potential• Nature of growth: health, convenience

Contents

Section 1:

Section 2:

Global dairy market developments

Considerations for the UK dairy chain

• Revenues on the global market are increasingly interesting, but none of the UK processors seems positioned to benefit directly

• Convergence with European/global prices is increasingo Removal of the quota system in 2015 might cause a stronger push of products into the

UK market

o Reduced importance of liquid milk as the primary milk price driver

• Milk prices generally benefit from a milk deficit situation, but in the UK they don’t

• UK dairy sector lacks a dominant multi product multinational co-op that is capable of absorbing the impacts of volatility, or even benefit from it

• UK is seen as an attractive target market for new entrants, for domestic marketreasons as well as for export ambitions

Strategic implications for the UK dairy chain