ANZ GRAINS REPORT

“THE GRAINS MUSTER”

March 2016

The growth predictions and numbers for China look enormous as urbanisation and rising incomes will lift milk demand from 45.9bn litres in 2012 to 74.7b litres in 2030

RISING URBANISATION & INCOME LEVELS WILL DRIVE DEMAND FOR DAIRY PRODUCTS IN CHINA…

Source: ANZ Analysis

In 2030, ANZ estimates that 33% (3.3mt) of China beef demand would be sourced from official beef imports, 4% (371kt, 1.4 million head) from live feeder cattle imports & 1% (102kt) from the grey trade

CHINA’S IMPORT DEPENDENCY WILL INCREASE WITH RISING DOMESTIC BEEF DEMAND…

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30%

40%

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3,000

6,000

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12,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Official beef imports Imported live cattle beef equivalent Estimated Grey Trade

Beef from Chinese cattle Imports as % of consumption (RHS)

China Beef Imports & ConsumptionIn thousand tonnes CWE

Source: China National Bureau of Statistics, IMF, ABARES & ANZ Analysis

Increasing domestic milk supply to meet growing demand in Asian markets, will require additional feed grain supplies for increase in cattle herd, which is estimated to increase to 3.8 million head by 2030 to achieve 12bn litres of milk production

2.9 2.9 3.0 3.0 3.1 3.2 3.2 3.3 3.3 3.4 3.4 3.5 3.6 3.6 3.7 3.8

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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Milk production (mil. litres) Dairy Cattle (mil. head)

Australia Dairy Cattle herd & Milk ProductionCattle herd is in million head & milk production is in million litres

AUSTRALIA NEEDS TO INCREASE ITS PRODUCTION LEVELS TO MEET THIS INCREASING DEMAND TO MAINTAIN ITS CURRENT MARKET SHARE…

Source: OECD-FAO, USDA, ABARES & ANZ Analysis

1.9 1.9 2.0 2.0 2.0 2.1 2.1 2.1 2.2 2.2 2.3 2.3 2.3 2.4 2.4 2.5

0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.9 0.9

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Beef Exports Beef Dom. Use

Australia Beef Exports & Domestic ConsumptionIn million tonnes CWE

INCREASE IN BEEF PRODUCTION NEEDS TO BE SUPPORTED BY ADDITIONAL FEED GRAIN SUPPLIES…

To export ~2.5 million tonnes of beef by 2030, cattle herd should be increased by ~7.6 million head from the current estimated 25 million in 2015, which will further increase pressure on domestic feed produce

Source: OECD-FAO, USDA, ABARES & ANZ Analysis

IN THE HIGH CASE, 1.8% CAGR IN DOMESTIC FEED WILL RESULT IN VALUE ADD ~60% AND INCREASED BEEF AND DAIRY EXPORTS OF ~A$32.4BN THROUGH TO 2030…

Source: ANZ Analysis

WITH JUST 7% OF THE WORLD’S FRESH WATER, 10% OF AGRICULTURAL LAND VERSUS NEARLY 20% OF WORLD POPULATION… WHAT ROLE WILL CHINA PLAY?

China Net Trade in Animal Protein – Beef, Pork, Poultry & Milk powder

Domestic meat production caters to around 99% of demand and it has increased over the past decade at a CAGR of 2.8%, thus driving feed demand for domestic production

Source: USDA & ANZ Analysis

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Beef Pork Poultry Milk Powder

Net Exports

Net Imports

China Net Trade in Grains – Wheat, Barley, Corn, Rice & Other

While Corn is the largest feed grain ingredient used in China, with an estimated share of 63% since 2005/06, high domestic prices led to increased imports of cheaper substitutes like Barley and Sorghum in the recent past

CHINA’S SUPPORT PRICE MECHANISM INCREASED DOMESTIC CORN PRICE, WHICH FORCED FEED MANUFACTURERS TO SWITCH TO LOW COST IMPORTS LIKE BARLEY & SORGHUM…

Source: USDA & ANZ Analysis

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Barley Wheat Corn Rice Other

Net Imports

Net Exports

China Net Trade in Oilseeds – Cottonseed, Peanut, Rapeseed, Soybean & Sunflower seed

EXPANSION OF THE OILSEED CRUSHING SECTOR, GROWTH IN FEED SECTOR & LIMITED DOMESTIC PRODUCTION LED TO HIGH OILSEED IMPORTS…Oilseed imports, dominated by Soybean, had more than tripled over the past decade. Oilseed acreage is increasingly shifting towards grain crops which have support price mechanisms

Source: USDA & ANZ Analysis

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Cottonseed Peanut Rapeseed Soybean Sunflowerseed

Net Imports

China Net Trade in Sugar

THE FALL IN SUGAR PRODUCTION DUE TO LOW PRICES LED TO SUGAR IMPORTS INCREASING OVER 5 MILLION TONNES…

Short term outlook for sugar consumption in China is sluggish due to economic slowdown, however over the long term continued urbanisation and investment in food manufacturing will drive the demand

Source: USDA & ANZ Analysis

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Sugar

Net Imports

Net Exports

CAN THE AUSTRALIAN SUPPLY CHAIN SUPPORT SUCH A GROWTH STORY?

Australia has invested in total storage capacity of 70mmt, catering for annual production of 44mmt. By comparison, Canada has a storage capacity of 80mmt, for 73mmt crop

Source: AEGIC

314

359 356

289

336

288

311

283 286

Median: 305

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

On current forecasts, the minimal outlook for price shocks is likely to see only a slow upward trend in grain prices

Wheat prices (US No.1 HRW Wheat) In AUD per MT

OUTLOOK FOR INDUSTRY PARTICIPANTS

Source: USDA ERS, Capital IQ & ANZ Analysis

Note: Wheat prices shown in the chart represent No. 1 hard red winter (ordinary protein), Kansas City, MO; Data is originally sourced in USD per bushel and converted to AUD per MT using 1 bushel equal to 0.0272155 Metric ton and respective monthly average AUDUSD exchange rates

OUTLOOK FOR INDUSTRY PARTICIPANTS

Australian grain trading sector is currently at an interesting point on a corporate timeline. With less than a decade since deregulation, the industry will continue to change

Source: ABC.net.au, “Analysis: Who owns Australia’s grain?”, 2nd May 2013

10%

20%

59%

11%

Permament Pastoral Row Infrastructure

Global

9%

88%

3%

Permament Pastoral Row Infrastructure

Australia

Globally, the flow of institutional investment in farming has been largely into row crops, skewed by investments into US and Brazilian soy and wheat crops, while in Australia the focus has been beef

OUTLOOK FOR INDUSTRY PARTICIPANTS

Agribusiness Fund Allocation by Sector

Source: Parsonage Lane Advisors

MARK BENNETTMICHAEL WHITEHEAD

THANK YOU