Dairy 2009 – Situation & Outlook Industry briefing 22 May 2008 (final)

1. Western Victoria Roadshow Dairy 2009 – Situation & Outlook Industry briefing 22 May 2008 (final)

2. Rough road to recovery • Cautious market recovery with slow GDP growth • Ongoing risk of volatility • Restored EU/US intervention • Trade reform complicated by short-term protectionism • Input prices remaining firm • Water access uncertainty • Improved rainfall in northern regions • Asset values under pressure • Sustained competition for milk • Choices in market/product mix • Capacity pressures in Nth Vic • Processing consolidation water Inputs Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service • Underlying confidence in demand • Stalled investment due to financial market turmoil • Short-term cashflow crisis in south • Uncertainty: climate & systems • Weakened consumer sentiment but increased spending power • Weakening food price inflation • Consumers preferring cheaper food options • More private label but QSR volumes boosted • Wholesale prices under pressure from falling commodity prices

3. Effect of the GFC on global dairy market Supply Economic climate Demand Supply response to high 2008 dairy prices High risk exposures for major banks Initial limits on trade credit Crop plantings harder to fund in some countries Tightened credit markets Firm grain/feed prices due to crop limits Recession in developed economies Consumers trading-down dairy spend Unreliable climates Build-up in dairy stocks Reduced demand volumes Lower disposable incomes in developing world Squeezed milk production margins Buyer caution on volume & price EU/US intervention restored Reduced milk supply expansion Currency exchange rate volatility Reduced product prices Rebalancing of dairy markets 3

4. The world market • Cautious market recovery with slow GDP growth • Ongoing risk of volatility • Restored EU/US intervention • Trade reform complicated by short-term protectionism water Feed production Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service

5. Stabilising international prices

6. What’s driving world markets? Supply Developing supply response to lower prices Declining output in EU/US Feed prices remaining firm Market intervention restored EU subsidies EU resisting further support Low product stocks (except cheese) Limited export availability from emerging low cost suppliers NZ supply continues to grow • Demand • Weak demand growth in developing markets • Recession affecting important markets • Lower cheese demand in Japan • Lower butter and cheese for Russia • Buyer caution with weakened demand • Global economy near the bottom

7. US & EU SMP stocks have reappeared

8. Impact of subsidies Clears domestic market • Support internal prices Exporters seek a lower price • Returns topped up by subsidy • Limits ability of unsubsidised prices to rise in competition Prevailing world price subsidy Exporter offer price New world price

9. Major exporter production

10. World market outlook Short term Short-term buyer caution Lack of transparency hinders stability Multiple influences on currency threaten returns Economic recovery in developing countries is crucial Supply response to low prices Prices finding new levels Medium term Increased sources of volatility Developing economies underpin ongoing demand growth Outlook: Supply lower than demand growth Dairy maintains relativities with substitutes Risks Further intervention? More protectionism?

11. Long range global outlook

12. The domestic market • Weakened consumer sentiment but spending power boosted by better disposable incomes • Weakening food price inflation • Consumers looking for value food options • More private label but QSR sales boosted water Feed production Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service • Dairy sales proving resilient – good volume and value growth • Wholesale prices under pressure from falling commodity prices • Worsening economic conditions and rising unemployment encourage more “trading down” • Value threatened but volume to remain stable

13. Domestic market a bright spot Supermarket growth by category Yr to May 2009

14. “Trading down” becomes “economising” Retail Milk From brand to private label Up from 2L to 3L From functional/modified to whole Cheese Changing pack size Lower sales of premium lines Other Strong “value” push in retailer promotion Faster sales growth by Aldi • Eating out/convenience • More meals at home • But eating out still on the agenda • Moving from casual dining to QSR • Supporting cheese volumes • Fewer impulse purchases • Hurting flavoured milk 14

15. Challenges from both sides • Sustained competition for milk • Choices in market/product mix • Capacity pressures in Nth Vic • Processing/marketing consolidation following NatFoods merger with ACF water Feed production Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service • Higher domestic share influencing milk value given price disparities • Lack of milk growth sustains pressure on capacity • Lower throughput will drive regional capacity restructuring • Retailers driving supply chain cost reductions

16. Shifting market mix Home market more important with more of the milk? Respective market/product returns evaluated Australian industry market mix

17. Farmgate market Average export returns and Murray Goulburn milk price 1990 to 2009

18. Farmgate market outlook in 2009/10 Southern: Opening prices announced Indicativeavge for Vic: $3.60kgMS, down 35% Lower end of DA forecast Full year outlook? S & O forecast down by 10-15% ($4.00 to $4.60) $A critical to final outcome, commodity prices need to rise Customers making shorter commitments due to caution on market conditions Fresh milk processors will mark off manufacturers but conscious of supply risks Fresh milk regions: Security of year-round supply remains the driver Contract prices set in 2008 remain in place Increased gap between southern and NSW/Qld prices Some prices under pressure due to surplus milk at times WA decline is stronger due to production growth & market deterioration in commodities

19. Milk production – slow recovery • Input prices remaining firm • Water access uncertainty • Improved rainfall in northern regions water Feed production Milk production Processing/ manufacturing Export Marketing Retail supplements Dist’n Import Food service • Underlying confidence in demand • Stalled investment due to financial market turmoil • Short-term cashflow crisis in south • Uncertainty: climate & systems

20. National Dairy Farmer Survey 6th year of NDFS survey 1,002 farmers interviewed Similar to last year 191 in Western Victoria Fieldwork conducted from mid-February to early March Response rate remained quite high at 72% 69% in 2008 Follow-up survey planned for early September

21. Production sectoris a story of several industries Farmer sentiment on these issues driven by nature of milk supply arrangements and seasonal conditions 21

22. Attitude to the industry Attitude towards the future of the dairy industry (% farms)

23. 3 year outlook Expected changes in production by region from 2008/09 to 2011/12 season (% of production)

24. Future challenges for growth Opportunity Strong faith in medium to long term prospects for the dairy industry Latent investment interest in the sector Land value impact of MIS failure Scope for gains from risk management Feed security Milk sales Threat Increasing volatility of margins Damage to herd capacity from 2008/09 market slump Uncertainty ahead Impact of CPRS Ongoing access to water + certainty of trading market regimes Labour & skills Improved ability to compete