Devondale Murray Goulburn Market Update

Devondale Murray Goulburn
Market Update
December 2014
Since our September update the global markets for key dairy ingredients continued to weaken
caused by the combined impact of supply build up in export countries and slower demand due
to stock build up in China and the Russian bans.
Long-term underlying dairy food demand from Asia remains
strong, with a net reliability on imports to satisfy the ongoing
growth in per capita consumption. However, international
dairy prices have continued to weaken in the last quarter
driven by increased supply from all of the main milk producing
regions. Supply side issues have been exacerbated as Russian
bans begin to have an impact and dairy stocks build in the
European Union, particularly Skim Milk Powder (SMP) and
butter. In addition to this, high stock build up in China has
added further difficulties creating a trifecta of issues which
underpins the current weakness.
In New Zealand, milk production is up four per cent, European
production is up 5.5 per cent, USA production is up 2.5 per cent
on last year and this has placed strong downward pressure
on global prices.
Given continued growth in global demand and a recovery
to normal buying patterns in China, the market will recover;
however, given the current complexities at this stage of
the commodity cycle, it is difficult to predict the timing and
strength of this recovery.
MG has worked hard on optimising product returns by
focusing on mix and pricing, combined with ongoing efficiency
drives on yield and conversion costs, to maximise the farm
gate milk price for our suppliers/shareholders, despite
the sharp decline in commodity prices. Accordingly, MG
has maintained its full-year forecast at $6.00 per kilogram
milk solids on a weighted-average available basis.
International dairy ingredients
There has been a trend over the last 10 months of declining
prices on the Global Dairy Trade (GDT) platform. GDT results
do not necessarily establish global prices in all categories;
however, it does shape and influence market sentiment and
buyer behaviour. The trading platform results continue to
underpin a negative sentiment in the market; however, the
fundamental issue facing the market right now is increased
availability from all major producing countries.
We also note that milk production quotas in the EU officially
end at the end of this financial year. We expect that this will
lead to supply growth in some EU countries, although this
will be dependent on farmgate pricing and input costs.
Figure 1: Percentage change in GDT price index
2%
0%
-2%
-4%
-6%
-8%
Source: Global Dairy Trade
14
14
2
De
c
v
No
18
4
No
v
14
t1
4
15
Oc
14
ct
p
Se
16
Se
2
1O
14
14
p
14
g
Au
19
5
Au
g
14
l1
4
15
Ju
14
ul
1J
17
Ju
n
14
-10%
Devondale Murray Goulburn Market Update December 2014
Currency
The Australian dollar (A$) has weakened considerably since
MG’s last Market Update – down from the low US$0.90 range
to the US$0.85–0.87 range. This has improved A$ returns for
MG suppliers, but has only applied to part of the year’s
currency requirements, which limits the impact.
Figure 2: US$ to A$ exchange rates 31 August 2004 to 30 November 2014
31
–
3 0 Aug
–N – 0
2 8 ov 4
– –
31 F e b 0 4
–M –
3 1 ay 0 5
– –
3 0 Aug 0 5
–N – 0
2 8 ov 5
– –
31 F e b 0 5
–M –
3 1 ay 0 6
– –
3 0 Aug 0 6
–N – 0
2 8 ov 6
– –
31 F e b 0 6
–M –
3 1 ay 0 7
– –
3 0 A u g 07
–N – 0
28 o 7
– v–
3 1 F e b 07
–M –
3 1 ay 0 8
– –
3 0 Aug 0 8
–N –0
2 8 ov 8
– –
31 F e b 0 8
–M –
3 1 ay 0 9
– –
3 0 Aug 0 9
–N – 0
2 8 ov 9
– –
31 F e b 0 9
–M –1
3 1 ay 0
– –
30 Aug 10
–N –1
2 8 ov 0
– –
31 Feb 10
–M –1
3 1 ay 1
– –
30 Aug 11
–N –1
28 o 1
– v–
31 Feb 11
–M –1
3 1 ay 2
– –
30 Aug 12
–N –1
2 8 ov 2
– –
31 Feb 12
–M –1
3 1 ay 3
– –
30 Aug 13
–N –1
2 8 ov 3
– –
31 Feb 13
–M –1
3 1 ay 4
– –
30 Aug 14
–N –1
ov 4
–1
4
1.12
1.09
1.06
1.03
0.1
0.97
0.94
0.91
0.88
0.85
0.82
0.79
0.76
0.73
0.7
0.67
0.64
0.61
0.58
Source: Bloomberg
Product mix
MG continues to optimise its production, sales and marketing
mix to maximise farmgate returns. This includes maximising
international and domestic retail and food service sales
volumes and maximising production of higher returning
ingredients sales such as infant nutrition powder and cheese.
Major initiatives include the relaunch of the Devondale
brand in China to support higher retail sales. In addition,
MG has also maximised cheese production by directing
as much milk as possible to the Northern Victorian
milk plants. Generally, cheese is a less volatile product
and provides improved returns when Full Cream Milk
Powder (FCMP) and SMP are trading in the lower range.
Much of MG’s Ingredients portfolio is in value add high
protein products for nutritional applications and speciality
fats for Asian markets.
Figure 3: FCMP v Cheddar
FCMP
Cheddar
5,500
5,000
4,500
4,000
3,500
3,000
2,500
Au
Ju
l–
20
12
g–
20
Se
1
p– 2
20
Oc 12
t–
2
No 012
v–
2
De 012
c–
2
Ja 012
n–
2
Fe 013
b–
2
M 013
ar
–2
Ap 013
r–
2
M 013
ay
–2
Ju 013
n–
2
Ju 013
l–
2
Au 013
g–
2
Se 013
p–
2
Oc 013
t–
2
No 013
v–
2
De 013
c–
2
Ja 013
n–
2
Fe 014
b–
2
M 014
ar
–2
Ap 014
r–
2
M 014
ay
–2
Ju 014
n–
2
Ju 014
l–
2
Au 014
g–
2
Se 014
p–
2
Oc 014
t–
2
No 014
v–
20
14
2,000
Source: Dairy Australia
Devondale Murray Goulburn Market Update December 2014
China brand relaunch
MG has relaunched its Devondale long life milk (UHT) in China
in new bilingual metallic packaging and pack sizes, with pack
designs implemented based on Chinese consumer research
and feedback. The range, which comes in 200ml and one
litre as well as associated family gift packs, reinforces MG’s
intentions to maximise the opportunities gained by the recent
signing of the Australia-China Free Trade Agreement (FTA).
The new metallic UHT packs have a premium look and feel
and feature a distinctive gold Devondale logo, reinforcing
our brand’s premium positioning in the market. The relaunch
and expansion of the Devondale UHT range in China is part
of MG’s strategy to capture the value of the increasing demand
by Asian consumers for safe, reliable dairy foods.
Australian dairy foods
Important MG updates
MG has a strong presence in the Australian dairy food
market, with approximately 50 per cent of revenues
generated via Devondale, grocery and food service channels.
These channels continue to perform well in 2014–15.
We recently won the Australian Grand Dairy award for our
Devondale Original Butter, made at Koroit. This award reflects
the great quality of milk produced by our farmers combined
with the enthusiasm and commitment of the team at Koroit
to make a high-quality, great-tasting product.
Another highlight has been the recent launch of our Devondale
chilled milk range and the sales expansion of our dairy
beverages portfolio.
Our 3D flavoured milk has recently begun being stocked in
Coles. The product is targeted to mums of kids a little older
than those who consume our very successful MOO product.
As a result of this, our current share of UHT flavoured milk
is 60 per cent, a real success in value adding to our business.
Our Liddell’s lactose free brand continues to perform very
strongly. Watch out for some new products in-store: Long life
custard, which can be found in the dessert aisle, and ice cream
(chocolate and vanilla) available from the freezer section.
MG welcomes China Free Trade Agreement
MG has welcomed the recent announcement of a Free Trade
Agreement with China. Managing Director Gary Helou said
a FTA with China was a vital step for the future of MG’s more
than 2,500 dairy farmer supplier/shareholders.
China is already the world’s largest dairy import market
last year, importing 2.2 million tonnes, an increase of over
40 per cent on the previous year. It is forecast that China
dairy demand and dairy imports will continue to grow.
Chinese customers and consumers trust the quality and
safety of Australian dairy products, and increasingly seek
it as a premium choice in both the ingredients and grocery
dairy foods. Therefore it is vital that Australia has excellent
and competitive access to the growing and strategic
China market.
The first objective in this FTA was to begin to redress the
disparity between Australia and New Zealand dairy trade, to
China. Second was to achieve a pathway to total free trade,
providing a competitive advantage and protecting Australia’s
long-term competitiveness in China. It seems these objectives
have been delivered.
MG is already investing in its manufacturing and in market
distribution footprint to provide world-class dairy foods
to China and south-east Asian consumers. The China FTA
will further cement MG as a first choice dairy foods supplier
to the China market, and this will support higher farmgate
returns to our dairy farmer supplier/shareholders.
Milk supply at MG
MG recorded strong milk growth to the end of quarter one
in 2014, with milk supply ex-farm nine per cent up on the
previous year. Milk supply growth was strongest in Gippsland,
Northern Victoria/Riverina and Tasmania. Sydney NSW milk
supply also entered its second year of full farmgate supply,
as the Devondale Dairy Business Centre (Sydney) received
local NSW milk.
Given very dry conditions in many key regions, it is expected
milk supply growth will weaken relative to last year as the
season progresses.
Murray Goulburn Co-operative Co. Limited ABN 23 004 277 089
Registered office: Level 15, Freshwater Place, 2 Southbank Boulevard, Southbank, Victoria, 3006

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