The Australian Dairy Industry November 2008

1. The Australian Dairy IndustryNovember 2008

2. Presentation Plan • Overview of the Australian Dairy industry • Dairy Australia’s position & role in the industry

3. Australian Dairy Industry Overview • National herd size approx 1.7 M. dairy cows • 8,000 dairy farms • Average dairy herd size 215 cows • Average milk yield per cow approx. 5,400 litres pa • Average milk composition tests indicate milkfat = 4.04% & protein = 3.30%

4. Australian Dairy Industry Overview • Milk production in 2007/08 was 9.2 billion litres – down 4% on LY • Estimated 2008/09 is 9.3 billion litres – up 1% on LY • Total value at farm gate $A 4.6 billion • 3rd most important rural industry in Aust – behind beef & wheat • Total value of exports $A 2.9 billion • 5th most important rural export – behind beef, wheat, wool & wine • Total value ex-factory $A 11.5 billion

5. Australian Dairy Industry Regions 5% 11% 4% 7% 66% 7%

6. Seasonality of Milk Production in Australia • Milk production is traditionally seasonal - reflecting the pasture-based nature of the industry.

7. Very dry conditions over the past 2 years

8. Milk Production 1979/80 – 2007/08 • Very strong growth through the 1990’s – increasing herd size & yields per cow [grain feeding]. • Significant impact of the 2002/03 drought – with a following stabilisation phase – then 2 more droughts.

9. Dairy farms and cows • Farm numbers steadily decreased – over many years. • Cow numbers steadily increased through the 1990’s – until the 2002/03 drought.

10. Milk Production and Yield per cow • Steadily improving milk yields per cow, combined with increasing cow numbers, has delivered strong growth in total milk production through the 1990’s.

11. Australian Dairy IndustryFarmgate [factory paid] Prices • No regulation of price paid to farmers – totally market driven. • Suppliers to co-operatives -> average returns from all markets – Aust & exports. • Suppliers to drinking milk companies -> contracted prices for year-round supply. • Australian farmgate prices are driven by & hence strongly correlated to export returns.

12. Australian farmgate prices vs Export returns • Australian farmgate prices are strongly correlated to export returns. • No regulation of price paid to farmers – totally market driven.

13. Australian dairy farm margins still under pressure - despite strong milk prices • Strongly increasing input costs: • Grain prices – on increasing feeding of grains. • Fuel prices. • Fertiliser costs. • Interest costs – on increasing debt levels. • But there has been financial recovery – in many regions – in 2007/08. • Stronger milk prices enable dairy farmers to invest in their production systems – to adapt to changing climate conditions.

14. Impact on dairy farm incomes & profits Source: ABARE Average farm debt increased by 50% since 02/03 to over $A 500,000

15. Climate change or climate variability ? • 3 widespread Australian droughts in 6 years. • Aust govt research – CSIRO [science] & ABARE [impacts on agriculture]. • We know: temperatures are rising [+1 degree so far, +1 degree by 2030]. • We’re reasonably sure: it’s getting drier [3 – 5% drier by 2030]. • We’re less certain: about runoff - the range of predictions is very wide. • It seems reasonable that variability &/or extreme events might increase: but the evidence is difficult to gather. • Working to develop regional predictions: mostare currently quite broad.

16. Future for the industry – on-farm • Increased climate variability is likely: • No going “back to normal”. • Farming systems will need to change: • More adaptable. • Flexible and opportunistic. • Adaptation is already happening: • Current Australian industry features a range of farming systems.

17. Rain-fed pasture Irrigated pasture Feedlot Supplementary grain & concentrate feeding Typical Australian production system ? • Continuum of systems operating in Australia. • Many farms feature elements of all these systems - in the future more will move between these extremes.

18. Future for the industry – on-farm • Adaptation strategies: • Greater risk management of bought-in feed. • Security and trade-ability of water access. • Greater water use efficiency. • Development of pasture species. • Improved feed conversion – e.g. DA’s Grains2Milk program - information and advice to farmers examining flexible feeding systems.

19. Australian Dairy IndustryDairy Manufacturing Environment 2007/08 • Approx 50% of total milk output is processed by farmer-owned co-ops: • Largest co-operative = 35% of milk – Murray Goulburn. • Public companies [WCBF]; multi-nationals [Fonterra; Kirin - National Foods & Parmalat]. • Private companies such as Bega Cheese, Tatura Milk, Ballantyne, Burra, Regal & many small niche specialty cheese manufacturers. • Milk processing sector undergoing continuing rationalisation. • Manufacturers responsible for own returns - no government price support.

20. Utilization of Australian Milk – 2007/08

21. Utilization of Australian Milk – 2007/08

22. Australian Dairy Industry - a major exporter Exports Australia • Australia exports approx. 50% of milk production - for a total value in 2007/08 of $A2.9 billion.

23. Australia’s Focus is on Higher Value products • With limited supply, Australian manufacturers need to ensure maximum return to the dairy farmer. • Australian product has high transformation, labour, packaging, transport costs. • Australia’s focus is on high value-added product. • The days of cheap commodity exports from Australia are well and truly over: • We are only interested in long-term business relationships with companies seeking high value, high quality products; in order to • Obtain the best possible returns for our dairy farmers - i.e. stable customers at world prices.

24. Australian Dairy IndustryValue of Exports by Zone - $A 2.9 B. in 2007/08 • Australian exports are concentrated in Asia / East Asia [69% of total].

25. Australian Dairy IndustryTOP 10 Australian Export destinations in 2007/08

26. The Australian domestic market • General food price inflation • Good market value growth • Demand affected by higher prices • Consumer sentiment under pressure • Increasing diversity of food service and convenience water Feed production Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service

27. Economic environment Slowing economic growth Inflationary pressures sustained Disposable incomes hurting Dairy market settings Food sales growing faster LY at 7-8% Food CPI is up around 5-6% Intensifying supermarket rivalry Same store sales = CPI Expansion by Aldi & independents Lifestyle shift to foodservice & convenience Fuel / interest rates will affect discretionary meals Higher milk values being pushed into market Australian market settings

28. Supermarket growth by category Year to June 2008 Supermarket sales growth

29. Cheddar cheese – volume vs. average price % growth Fresh modified milks – volume vs. average price % growth Rising prices biting volumes?

30. Consumers ‘trading down’ • Milk • Plenty of choice in milk category • From branded to private label • From modified milks to regular whole milks • Pack size up from 2-lt to 3-lt • ALL options reduce $ / litre cost • Cheese • Changing pack size – same $ spend / smaller pack size

31. Long-term per capita consumption trends in Australia

32. Dairy Australia’s position & role in the industry

33. Dairy Australia • Dairy Australia was formed on 1 July 2003 – a merger of ADC & the DRDC. • Is a single dairy industry owned & funded service organisation. • Corporate objective: “To grow an internationally competitive, innovative & sustainable dairy industry.”

34. Australian Dairy Industry Levies - 2007/08 • Industry level activities are funded by farmer-paid levies charged on all milk produced in Australia. • Levies charged on milkfat and protein content of milk: Total Levy = 0.3 cents / litre [or $3,000 per 1 M. lts production] [Less than 1% of farmgate price] • Plus matching R & D grants [$A15 M.] from the government.

35. Dairy Australia budget by Objective – 2009 - 2013

36. Dairy Australia Key Functions • Research, development & extension for the benefit of the dairy industry –> from on-farm & to manufacturing – to improve competitiveness. • National market development –> to increase domestic demand for dairy products – by leveraging dairy products’ health and nutrition benefits. • International trade development –> to improve the international trading environment – to enhance export market growth. • Information services -> to provide statistical & library services to the industry. • Industry relations & communications -> with farmers & the wider community. • Technical issues management -> addressing environmental & community issues - e.g. food standards; animal welfare; environmental sustainability; biosecurity; etc.

37. Australian Dairy Industry: Drought Response • A co-ordinated response: Dairy Australia, ADF & state farmer bodies, ADPF, Government & manufacturers. • Information & planning tools: inputs data (e.g. feed reports), updates, briefings. • Financial & support services: assistance packages, milk price support, incentives, working closely with farmers, loans & feed sourcing. • Local assistance: Regional Co-Ordinators. • Water management: Increased efficiencies - $10 billion Water Plan (Jan 2007); • Little happened in 2007 – was an ‘election year’ in Aust – expect more co-operation between state & Federal governments this year.

38. Thank You For a comprehensive overview of the Australian dairy industry see the “Dairy 2008: Situation & Outlook” report – available fromwww.dairyaustralia.com.au