Dairy Market ReportTuesday 12th December, 2015

Market summary:

• Output easing or growing more slowly, but overhang of milk output and stock• Demand sluggish due reduced Chinese activity,

Russian ban and low oil revenue • Stocks building (APS, intervention, commercial)• Prices remain weak – worse globally than in EU or US• Rebalancing of supply/demand: when, not if• A good number of positive factors remain relevant• Big question: how soon in 2016 will prices recover for

farmers?

EU output still rising

• EU: Milk prices holding up as good retail returns in large domestic markets like France & Germany are subsidising lower export/ ingredient returns. • UK: Large scale, low cost models have become a bigger part of the supply picture, making up for the exit of smaller farmers. Any shift to spring calving will compound summer processing capacity issues.

EU output up 1.5%Strong lift in mid-tier countries:• Ireland +11.4% Jan-Oct• NL +4.6% Jan-Sept,

+11.4% Oct alone• Poland +2.2%• UK +1.5%Static to down in larger countries• France 0.5% down w/e

15th Nov, cow culls up 10%

• Germany Jan-Sep -0.5%Static or well down in most other EU member states.

Source: EU MMO

Source: EU MMO

Source: Ornua

French milk collections down

Falling French milk price will further curb output

Output elsewhere

• Global output only up 1.1% Jan-Sep – estimated1.2% up Jan-Oct• US Oct output only 0.1% up

• Calif drought, slightly lower cow numbers and yields, more acreage in Calif moving to nut growing, lower prices

• USDA forecast + 1% full year suggests drop by 0.2% Nov-Dec (after +2.4% in 2014)

• Internal demand utilising all output growth• Strong US$ hampers export competitiveness

• NZ output down 7.2% in Sep, 2.7% in Oct• Cow culls significant (though slightly down in Oct)• Official prediction is for 5-10% fall in 15/16 season• Profitability seriously challenged: recent GDT could yield reduced milk

price forecast to 17-19c/l equivalent.• El Nino impact expected Dec-Feb.

• Oz output down 0.4% in Oct due El Nino (moisture deficiency)• First time this season it falls back on previous year

Source: Ornua

Stocks building

• SMP intervention: 23,638t• SMP APS

• Old regime: 25,000t (over 50,000t offered since Sept 14)• New regime: 3,154t offered todate (since mid Oct 15)

• Butter APS• 85,000t approx (156,000t went through since Sept 14)

• Cheese APS• 27,000 t approx from NL, It, F, UK, Sw, Irl

• US SMP stocks: 96,000t (Sept 15); butter stocks 81,000t (Oct 15)• Commercial stock in NZ, reports of “distress” sales

esp. African markets

Demand remains positive story – with some issues

• Issues:• Chinese buying activity remains lower than 13/14, higher

domestic production, but stronger infant formula imports• Oil prices low => export revenues of many customer countries

reduced, demand suffering in consequence• Russian ban extended a further year.

• Nov-April: 6 strong events for dairy demand:• Thanksgiving, Christmas, New Year’s Eve, Easter, early Ramadan.

• Pre Xmas demand lifting UK spot prices to 20-21ppl (30cpl)• Weak Euro making EU exports competitive• Strong export growth for most products, incl. Cheese in

recent months.• What of Russian ban and EU sanctions re. Syrian crisis?

Markets per product:

• SMP• Market oversupplied, prices back to intv levels, trade at those prices. • With stocks building, buyers build low prices into 2016 budgets.

• Butter• Good domestic demand continues in western markets, despite increased

output.• Outlook more positive than for other products, but we’re now post holiday

demand period.• WMP

• Chinese demand down, but has left room for other buyers.• Continued weakness expected in early 16. NZ/China relationship will

make market.• Cheese

• Alternative options and poor whey returns restrain cheese output. Demand expected flat.

• Weak euro aiding exports despite Russian ban. UK demand in balance with supply for mild cheddar pre-Xmas, some mature stocks building.Source: Ornua

Strong exports in 2015 compared to previous years

Source: ZMB

Strong EU exports in 2015

Source: EU MMO

Three tier dairy market (1)

Source: EU MMO

Three tier dairy market (2)

Source: EU MMO

Three tier dairy market (3)

Source: EU MMO

Global dairy prices: GDT

1st Dec auction + 3.6%

• New age guarantee (fresher product) with price premium (powders) appealed to buyers

• Smaller quantities to manage market

• Mixed picture in NZX futures, but positives for SMP and butter

• Prices at this auction reflect this, but impact on global markets?

Gross return: 27.95c/l – processing costs @5c/l =

22.95c/l

Spot milk prices in EU

Source: EU MMO

EU prices ease…

Source: Based on EU MMO

…but still underpin current Irish milk prices

29.27c/l – 5c/l processing costs = 24.27c/l + VAT = 25.53 c/l incl VAT

22nd November 2015

Calculations at 26/11/15Avg EU mkt price at 22/11/15 - €/t

Trend re prev wk c/l equiv

Estimated coeff.

BUTTER 3040SMP 1740 29.03 35% 10.16CHEESE 3030WHEY PWDR 590 31.43 41% 12.89WMP 2290 28.40 8% 2.27OTHER* 24.68 16% 3.95

29.27ASSUMING THAT "OTHER" RETURNS 15% LESS THAN SMP/BUTTER

29th November 2015

Calculations at 07/11/15Avg EU mkt price at 29/11/15 - €/t

Trend re prev wk c/l equiv

Estimated coeff.

BUTTER 2980SMP 1720 28.66 35% 10.03CHEESE 2870WHEY PWDR 590 29.79 41% 12.21WMP 2240 27.78 8% 2.22OTHER* 24.36 16% 3.90

28.37ASSUMING THAT "OTHER" RETURNS 15% LESS THAN SMP/BUTTER

ESTIMATE OF RETURNS FOR REPRESENTATIVE IRISH PRODUCT MIX(GROSS RETURNS, BEFORE DEDUCTION OF PROCESSING COSTS)

ESTIMATE OF RETURNS FOR REPRESENTATIVE IRISH PRODUCT MIX(GROSS RETURNS, BEFORE DEDUCTION OF PROCESSING COSTS)

28.37c/l – 5c/l processing costs = 23.37c/l + VAT = 24.60 c/l incl VAT

Source: EU MMO

Futures trends: some positives

• EEX Futures • 19 lots (95 tonnes) traded on EEX yesterday (7th Dec), with all trade activity

taking place on SMP and the traded months settling higher. • Q1 traded a combined 17 lots yesterday with Jan16 trading 10 lots, settling up

€18 at €1,682, Feb16 , traded 5 lots also settling up €18 at €1,682 while Mar16 traded 2 lots settling up €4 at €1,721.

• A further two lots traded on Apr16 SMP as it settled up €5 at €1,760. • NZX Futures • NZX WMP continues to edge higher, though on relatively light traded volume. • A total of 440 lots/tonnes traded overnight with 340 lots of WMP and 100 lots of

SMP. Dec15 WMP traded 40 lots settling unchanged at $2,250. Q1 2016 traded 20 lots per month settling up $5, $25 and $25 respectively.

• Q2 2016 traded 240 lots all settling up $50-$95. Apr16 traded 110 lots overnight, settling up $70, May16 traded 95 lots settling up $50 and Jun16 traded 35 lots settling up $95.

• A further 100 lots/tonnes of SMP traded on NZX overnight, all of which traded on Feb16, settling unchanged at $2,080.

Source: FCStone

Teagasc Annual Review and Outlook 2016

2015 ESTIMATE 2016 FORECAST

Milk price 30 c/l (down 24% on 2014)

31.5c/l

Milk production +10% on 2014 +7% on 2015

Production costs 23.5c/l 23.3c/l (largely due to no change in fertiliser costs, increase in use of feed, but decrease in unit price + dilution over larger milk volume)

Margin per litre 6.5c/l (45% down on 2014)

8.2c/l (+25% on 2015)

Margin per ha €770/ha (55% down on 2014)

€1030/ha (+34% on 2015)

EU Commission Medium Term Report positive

• Annual EU milk growth rate to 2024 expected 0.8% (2015 will be 1.5%+)• Most growth in Germany, Netherlands, Ireland, Denmark, NW

France (Old EU 15, NW)• Poland could develop at expense of Czech Rep and Hungary• Consumption growth from export to third countries and some

slow domestic increases (EU consumes 90% of its own milk)• Milk prices to remain “relatively firm” at around EUR350 per

tonne (34c/l) thanks to consumption growth. • Prices unlikely to return to EUR402 per tonne at the height of

the 2013 boom. • Unless we have a repeat of the weather conditions which

helped contribute to that rise.

Milk Prices

Sept 15 milk league (no change in Oct except -1cpl West Cork)

IFA campaigns to hold current milk prices

Base price at 3.3% p 3.6% b/f = 25c/l incl VAT

Thank you for your attention!