Opening Statement by Mr Aidan Cotter,
Chief Executive Officer, Bord Bia
to the
Joint Committee on Agriculture, Food and the Marine
Developments in Dairy Markets
3rd February 2015
Mr Chairman, Committee Members
I would like to thank the committee for the invitation to address you today
regarding global dairy market developments and the impact on exporters.
I am joined this afternoon by my colleagues, Padraig Brennan, Sustainability
Development Manager and David Owens, Sector Manager for Dairy Ingredients.
The imminent removal of EU dairy quotas and the forecast 2 billion litre increase
in Irish milk production by 2020, albeit coming at a time of short-term market
weakness, represents a major and long-term opportunity for the sector.
Slide 2: Food and drink exports
It comes also at a time when the sector has already been making a significant
contribution towards the growth in our overall food and drink exports, which
recorded their fifth consecutive year of growth in 2014. Dairy exports increased
by 3% last year, to leave trade some 56% higher than five years earlier.
When
dairy based enriched powders are included, the value of dairy exports was
almost €3.8 billion or 36% of the total.
In the trade statistics dairy based enriched powders are classified as a prepared
food, yet are an integral part of the industry’s product mix and represent a
significant proportion (7%) of our overall food and drink exports.
Slide 3: Irish dairy exports
Over the past decade the value of Irish dairy exports has more than doubled.
And as the dairy sector begins to realise the opportunities now opening up, it is
set to drive total export revenues by the end of this decade.
Slide 4: Dairy exports are more internationally oriented
The Irish dairy sector is well positioned to do so, in that it has an international
marketing footprint that is truly global. While as much as 40% of our total food
and drink exports are destined for the UK market, just 32% of our dairy exports
go there. And while almost 40% of dairy exports go to international markets,
only 29% of total exports are destined for markets outside of the European
Union. The growth in exports in recent years has focussed on Asia, Africa and
the Middle East, which now account for 80% of dairy exports to International
markets.
Irish dairy products were exported to 138 countries in 2014.
Slide 5: Irish Dairy Exports to China growing rapidly
But the most striking trend of all is the sustained growth in exports to China,
which is now our dairy industry’s second largest market after the UK, driven
largely by the growth in infant formula exports. The progress made is
highlighted by the fact that in 2008, China was 13th in terms of export markets.
Slide 6: Dairy Brands in China
And with an emerging branded presence and pursuit of new opportunities by
Ireland in the market, the role of China in determining the fortunes of our dairy
industry, both direct now and indirect, could hardly be overstated. China is now
the world’s leading dairy importer and has a per capita dairy consumption level
that is less than 1/3 of the global average.
Slide 7: Dairy exports to non Euro areas
With up to 45% of dairy exports destined for international markets which
predominantly trade in US dollars and a further 27% destined for the sterling
area, any change in exchange rates has the potential to impact on the
competitiveness of Irish food and drink exports.
Slide 8: Change in Euro versus different currencies
In January 2015, the euro was over 14% weaker against the US dollar and 7%
weaker against Sterling. These developments are helping to boost the
competitiveness of Irish exports and should help to offset some of the decline in
global dairy prices. If all other factors were equal it could help boost the value of
Irish dairy exports to the tune of 8%. However, a number of factors such as
availability, demand developments and the level of competition from other
suppliers, will influence potential returns. It is also likely to take some time
before any such currency related benefit may be fully realised.
The fact that the euro is weakening against other leading export regions such as
the United States, New Zealand and Australia is helping to drive the relative
competitiveness of European dairy products on world markets.
Slide 9: Supply Challenges
The drivers of growth in the demand for food are relentless, and I’ll come back
to them in a moment, yet they are being met by new supply challenges that
didn’t exist before; falling rates of growth in productivity, climate change,
unpredictable weather events and volatility, a world facing water scarcity, when
agriculture requires 70% of it for irrigation, a fixed land supply and the
competing use of it for fuel as well as for food.
Slide 10: Growth in Global Dairy Supplies through 2014
Favourable weather conditions and strong producer prices have led to a strong
increase in production in many of the world’s largest dairy export regions over
the past year.
During the 11 months to last November, combined production in
New Zealand, Australia, the EU and US increased by almost 4% or 9 bn litres of
milk.
The rate of growth slowed towards the end of the year as farmers
responded to falling dairy prices.
Slide 11: Dairy Market Volatility
Volatility is not a new phenomenon within the dairy sector as you are aware and
as this slide indicates.
Since 2007 weather related supply shocks, disease
issues, trade restrictions etc has led to significant price movements in
International dairy commodity prices and in resultant dairy farm prices.
The global dairy market entered 2014 at strong price levels, however
international commodity prices started to ease in Spring with declines
accelerating throughout the Summer period. Excess supply combined with a
slowdown in Chinese import demand, a Russian ban on dairy products, ebola in
West Africa and falling oil prices placed downward pressure on markets in
particular in the latter half of the year.
The average global price of WMP in US dollar terms fell by 42% in December
2014.
Looking ahead for 2015, there certainly are some challenges facing the sector,
however as we progress into February the outlook looks set to improve. There
have been some signs of a stabilisation / uplift of global dairy prices in recent
weeks. Dry weather in Oceania is accelerating the seasonal decline in Australian
and New Zealand milk production.
Recently, the New Zealand dairy co-op
Fonterra has reduced its milk volume forecast for the 2014-15 season by 3%,
reflecting the impact of dry weather on production. Their previous forecast in
December had suggested that output would be similar to last season. This will
have an impact on the availability of dairy exports on International markets.
Recent currency movements, with the euro now hitting a 9 year low against the
dollar has, as already noted, made European dairy exports more competitive on
International markets.
Slide 10: Whats Driving Global Demand for Food
Looking at the medium to long term prospects for dairy, there are significant
growth opportunities for the industry.
Population growth is certainly a key factor in driving the global demand for food,
it is growing at a little over 75 million people a year, and will reach just over 8
billion by 2025. It is a population that is urbanising as it is growing, today 54%
live in cities, in ten years that will rise to 58%, driven almost entirely by Asia
and Africa, and will grow to 66% by 2050 when the world’s population is set to
reach 9.6 billion people.
Slide 11 India and China Make Waves in the Global Middle Class
And it is that urbanisation that is associated with the growth in the middle
classes, with changing lifestyles and shifting dietary habits toward more protein
based foods and dairy products, that is really driving growth in the global
demand for food. According to an OECD working paper some 3 billion people
will join the middle classes over this and the next decade. And as we can see
from this chart, that market will be located predominantly in Asia.
Slide 12 Global population continues to grow older
Part of the reason the population is growing and a major feature of demographic
change in the developed world, is that people are living longer. And as they live
longer, they recognise the link between diet and health, they want to feel better,
look better, and lead an active and healthy lifestyle.
Health and wellness is
undoubtedly the single biggest long term driver of change in food markets today
and those who can leverage it effectively, through nutrition, are those who will
ultimately prevail in the marketplace. This will be a key driver for value added
dairy ingredients going forward.
Slide 13 Emerging markets driving global demand
In the meantime, that surge in demand finds expression in the latest ten year
rolling forecasts from the FAO and OECD, projecting the growth in the global
demand for protein, here in the form of livestock and fish products in the period
to 2023.
The red bars rising highest represent the exceptional growth projected for the
developing countries, or emerging markets, the dark green represent the more
sedate growth projected for the developed countries, namely those in the OECD
area, and the lighter green is the average, namely world demand.
It is notable too how among the highest growth categories, representing the
bars rising highest, are those representing the growth in dairy products.
Slide 14 Global Consumption of Dairy Products to 2023
The scale of growth comes into perhaps sharper relief when expressed in terms
of the total growth expected over the period, with total global consumption set
to grow by 27% but rising to 34% in China and over 40% in Africa and India in
just the ten years ahead of us.
Slide 15 World Dairy Prices to 2023
The FAO OECD projections to 2023 were released in 2014 when prices were still
high, albeit they correctly anticipated the subsequent decline which we have
been recently experiencing. As we can see from this chart they are nevertheless
projecting that dairy product prices will continue to remain well above historic
levels over the forecast period.
They similarly acknowledge that actual price outcomes are likely to exhibit
variations around the projection trend, whether due to weather, or other
changing conditions.
By any measure one might take, the medium-term prospects for dairy remain
positive and Ireland, with its international focus and presence in the regions of
the world where demand is growing fastest, is well positioned to benefit.
Slide 16 Customer priorities…..sourcing from Ireland
That is not to say that markets will not remain keenly competitive, of course
they will, and it is a matter for each and every individual enterprise to pursue
every competitive edge one can leverage in the global marketplace.
And so it was with this in mind that in 2014 Bord Bia, in association with the
industry, undertook an evaluation among key customers in three target regions,
the EU, China and Saudi Arabia to assess buyer priorities, perceptions about the
positioning of Ireland and our industry, and the role of sustainability in light of
the earlier launch of Origin Green and the Sustainable dairy Assurance Scheme.
Slide 17: Customer priorities…..sourcing from Ireland
A common thread running throughout our research was the emphasis placed on
security of supply, with some referring to the need to move towards long term
agreements and extending to the search for acquisitions and alliances in China.
In this context the growth potential opening up in Ireland has been a source of
keen interest by customers.
Similarly, the perception of cost competitiveness and the potential of Ireland
based on its grass-based production systems were seen as clear strengths.
In
Europe, price and quality are not surprisingly perhaps the primary drivers of
choice, yet managing volatility, is an issue frequently cited as a concern for
buyers.
The emphasis on price and quality – and Ireland is perceived to be strong on
quality – does not provide a basis for differentiation and the creation of value.
But sustainability does and Ireland is well placed to capitalise on our sustainable,
grass based dairy production and the opportunities that are arising in the global
marketplace.
Slide 18: Consumer Ethnography
It must also be evident to us all that just as a large and growing segment of our
dairy exports are destined for markets in Asia and in Africa, an understanding
and insight into the use of our dairy ingredients and products by consumers, in
what are different cultural contexts, is critical if we are to add value and
differentiate the Irish dairy offering and support our customers in these markets.
And so our Consumer Insight Team in Bord Bia has been working with industry
to build these insights through ethnographic consumer research, which involves
our researchers visiting and staying in the homes of consumers, shopping and
eating with them and looking in their fridges, to better understand consumer
attitudes and behaviour. All of the faces you see in this and subsequent images
are real people and families that participated with our team in this research.
The research advances our understanding in these markets, supports the
industry’s customers, while identifying product and messaging opportunities
around dairy products amongst different demographic cohorts.
Slide 19: Consumer Ethnography in China
We have most recently extended this work to the Chinese market where our
researchers spent three hundred hours over recent months, visiting and staying
in the homes of consumers in Beijing, in Shanghai and in Chengdu, studying
their attitudes and behaviours, conducting brand clinics, and exploring how
Ireland can uniquely position itself, so that working with Irish suppliers, including
global infant formula players with a presence in Ireland, and their Chinese
partners, we can build an awareness and preference for our dairy products
among premium Chinese consumers.
Slide 20: Marketplace International
On March 26th next, Bord Bia is organising Marketplace International where we
will be bringing close to 450 buyers to meet with over 170 Irish food and drink
manufacturers. Up to 300 of these buyers will come from overseas markets.
Slide 21: SDAS
The Sustainable Dairy Assurance Scheme, an integral part of Bord Bia’s Origin
Green initiative, was formally launched by the Minister for Agriculture, Food and
th
the Marine on 11
December, 2013.
The SDAS is a unique dairy farm standard
in that it’s a national programme that incorporates both quality assurance and
sustainability criteria and includes the routine carbon footprinting of farms.
This standard was developed in consultation with all industry stakeholders, it has
created a new challenge for competitors just as it is winning the respect of
customers.
The aim of the SDAS is to demonstrate to our international
customers at a business to business level that our dairy is produced in a
sustainable manner, and uniquely we can prove it.
The SDAS is currently being rolled out at farm level, with 8,454 applications
received to date, 4,728 audits conducted and 3,847 certified farms (as of Jan
30th).
We are on track to have most Irish farmers participating in the scheme
by the end of 2015.
Slide 22: Promoting Origin Green Dairy in International Markets
The Irish dairy industry through the Irish Dairy Board and the Kerry Group is
funding a Bord Bia campaign to the tune of €1million annually to promote the
SDAS and Origin Green to global customers, with a focus on China, the Middle
East and Europe.
Slide 23: Origin Green Ambassadors
Bord Bia has developed an Origin Green Ambassador programme involving 10
talented, experienced and motivated graduates. Their role is to raise the profile
and understanding of the Irish food and drink industry’s Origin Green initiative
among key audiences internationally; to provide the Irish food and drink
industry with comprehensive insight into global best practice in sustainability;
and to be a cohort of executive talent to lead the Irish food and drink industry in
its ambition to become recognized as one of the most sustainable in the world.
As part of this programme, the individual Origin Green Ambassadors have
already undertaken six month placement in leading international accounts such
as Abbott, Coca Cola, Fair Oaks Farms, McDonalds, Marks & Spencer, Metro,
PepsiCo, Subway, Tesco, Walmart, Subway, Unilever and Nestle.
Some of these
individuals have been involved in dairy procurement and dairy sustainability
projects within these global leaders which has had a direct and positive impact
on these companies attitude towards Ireland as a leading global supplier of
sustainable dairy.
Slide 24: Reputation
This is a world in which reputation is everything and in a competitive dairy
marketplace where countries compete with countries reputation is critical. This
chart shows how some thirty years ago 80% of the value of companies that
made up the S&P 500 was made up of tangible, physical assets. Today 80% of
their value is made up of intangible assets, like technology, or reputation.
While we acknowledge that the dairy sector will experience periods of volatility
due to a range of external market factors, the medium to long term trend is
positive. An industry focussed on market diversification, innovation and adding
value while seeking ways to differentiate itself in an ever competitive market
environment will help to insulate the sector from the worst effects of market
volatility.
Mr Chairman, I would like to thank you and the members of your committee for
affording me the opportunity of addressing you this afternoon. My colleagues
and I are happy to address any questions you and the Committee may wish to
ask at this time.