America’s Role in the Emerging Global Dairy Market

Philip Turner 24 May 2005 Washington DC

Fonterra is the world’s leading dairy exporter...

• Private cooperative owned by 12,000 farmers • Assets $8.3 bn, revenue $7.8 bn • World’s largest dairy exporter – second largest processor of milk after DFA • Collects 40 billion pounds of milk • NZ base produces 2% of world milk – less than California and Wisconsin • Increasingly procures product around the world - Latin America, Australia, US • Through Dairy America, one of the largest dairy exporters from the US • In US: in 2004 1 bn pounds milk worth over $300m 2

We see excellent prospects for growth in world dairy consumption Average Annual Growth in Dairy Demand 2003 - 2010

14.0% 5.0% 3.5% 3.0% 1.0% 1.0% China South East Asia Middle East/ North Africa Latin America North America EU-25 2.0% Total World

Total annual demand growth exceeds NZ’s annual milk production

3

But only a fraction of world demand is met through trade...

Dairy Exports as a Share of the Total Global Dairy Market (2004)

Consumed Domestically 93% Exports 7% 4

This partly reflects barriers to trade and subsidised support for dairy Butter Tariffs (%) Domestic Support for Dairy Farmers ($bn per year)

660 24 140 115

PSE 51%

11

PSE 45%

Japan EU US EU US

The EU spends $1.83 billion per year (2003) on dairy export subsidies

5

Happily, growth is strongest where trade barriers are lowest Dairy Consumption Growth versus Tariff Protection 2003 - 2010

244% 14.0% Japan 2.0% 72% 1.0% 54% 1.0% 24% 6.0% 3.0% 24% 15% 5.0% 12% EU US Sub Saharan Africa Latin America

Tariff Protection

China

Consumption Growth

South East Asia • Consumption Growth: ZMP, Rabobank, 2004; Average annual change 2003 to 2010 • Tariff Protection: Average outside tariff quota rate for chapter 4 dairy products (EU, US, Japan average OTQR AVE for SMP, WMP, Butter and Cheddar Cheese) 6

Demand by value will continue to be dominated by developed countries...

Dairy Consumption 2008 (USD millions)

100,000 58,000 42,000 35,000 20,000 12,000 Western Europe America Austra lasia Latin America Eastern Europe Africa / East East 8,000 Asia / Pacific 7

...but the main growth will come from the developing world Growth of Dairy Consumption

100,000 4.50

4.50

1.25

3.25

58,000 1.50

42,000 35,000 3.00

20,000 3.50

12,000 8,000 Europe Europe America lasia America Europe Europe East Middle East Pacific

2008 USD millions CAGR 2003-08

8

There is enormous scope for growth in per capita demand...

Milk Powder Consumption 2003 (kg per capita)

0.8

0.8

0.5

0.4

0.3

0.2

China Indonesia Thailand Philippines Malaysia Singapore Source: Fonterra Internal Analysis 9

China will be a powerful engine of demand growth as incomes and urbanisation increase Supply versus Demand – China

60 50 40 30 20 10 0 Domestic demand growing at CAGR of 9.3% 2002 Domestic milk supply growing at CAGR of 7% 2020 Supply gap of over 20 Million MT ME by 2020 10

Since supply of milk is constrained...

EU

supply will reduce due to : – CAP reform – accession – the end of export subsidies through WTO

Oceania

will grow less quickly than in the past: – New Zealand milk growth slower due to competition for land use and rising costs – Australian supply will be limited by water Result will be more dairy products traded and consumed, at higher and more stable prices 11

Strong demand will open the door to new exporters Existing suppliers will be unable to fill the gap . . .

EU in retreat Ukraine / Eastern Europe?

USA?

So where will the milk growth come from?

India / Pakistan?

Argentina / Brazil / Chile / Uruguay?

Oceania to grow more slowly 12

In Latin America, unlike China, supply will exceed demand – it will be a bigger force in exports Projected Mercosur Supply versus Internal Demand

45 40 35 30 65 60 55 50 Domestic Milk supply growing at CAGR of 4% 2002 Domestic demand growing at CAGR of 2% 2020 Surplus supply of over 15 million MT ME by 2020 13

How does the US fit into this picture?

Change is occurring in the US industry already: • On-going shift of milk production and processing towards the west and south west • Consumer demand driven by health – particularly obesity – presenting both opportunities and threats • A significant threat from soy for market share • Doha Round / budget pressure will force US to end its subsidised exports and may affect its domestic support model • Higher (on average) and more stable world prices will promote US dairy exports 14

Though the US is a minor player in the world market, US dairy exports have been rising steadily US Dairy Exports Value (USD m)

1,490 1,018 795 353 Qty 1990 202,908 MT 1995 465,437 MT 2000 566,900 MT 2004 833,549 MT 15

With recent growth particularly in non-fat dried milk powder US Dairy Exports Volume 2004 (tonnes)

258,447 208,165 61,277

% growth 2003-04

Non-fat dried milk powder 75% Whey Products 21% Cheese 18% 16,059 Whole Milk Powder 21% 16

The US has significant opportunities to exploit growth in world dairy demand

• Strong demand + more trade + supply changes = opportunity for US • US exchange rate a factor but not a driver • US industry, like Fonterra, needs market access barriers to come down – e.g. Canada, European Union, Japan • Increasingly the US industry is poised to respond to the opportunity 17

US is currently a minor player in the world market

18

Whether it takes the opportunity to become a significant player globally....

...largely depends on the US dairy industry

19

20