Brazil's role in the global dairy industry is uncertain as production and consumption growth are expected to slow in the coming years. While Brazil has historically been an opportunistic exporter and minor importer, this could change if import taxes are removed. Overall dairy production will continue to consolidate and become more efficient through technology adoption and larger farm sizes. However, structural changes in the industry will see many small producers leave the business despite overall production continuing to rise at a slower pace of 2-3% annually. Coordination across the entire dairy chain as well as domestic and trade policies will significantly impact Brazil's future in the global dairy trade.

1. Marcelo Pereira de Carvalho
CEO - AgriPoint
9 de maio de 2014
What will be the role of Brazil in
the coming years?

2. AgriPoint
A company in the information business for agricultural
sectors, with dairying being the main area.

3. Our services/products for the dairy sector

4. Forecasts/Previsões

5. Forecasts/Previsões
In 2020, Brazil would be exporting between 1,7
and 6,0 billion liters/year...

6. It’s not east to make forecasts...
• The time frame they are done affect our
perceptions and therefore the results
• Many different and uncontrollable variables
• We live in a moment of significant changes

7. In 14 years, nearly 50 kg more per person...
122
120
127
125
128
132
136 136
141
153
160
168 168
171
100
110
120
130
140
150
160
170
180
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Per capita milk consumption (milk-equivalent/year)
Source: MilkPoint
Add to that 28 million more people consuming!
Total market: +62% or +13 billion liters

8. Market growth dynamics
3.12%
2.26%
1.64%
1.46%
3.18%3.13%
5.56%
1.34%
1.76%
4.27%
4.42%
5.08%
1.01%
3.38%
4.02%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
1989-2000
2001-2006
2007-2013
Source: MilkPoint

9. Production growth
7,500
10,000
12,500
15,000
17,500
20,000
22,500
25,000
27,500
30,000
32,500
35,000
Milhõesdelitros
Fonte: IBGE / Elaboração: MilkPoint
4,1%
3,2%

10. How much of our consumption is produced internally
88%
90%
92%
94%
96%
98%
100%
102%
104%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Self-sufficiency Index (production/consumption)
Source: MilkPoint
Can Brazil be considered a structural
importer?

11. Brazil x world milk price
Source: MilkPoint, based on gDT and Cepea values
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
R$/litro
Equiv. LF importado (R$/l) Média CEPEA BR

12. • Trade policy: 27% tax for WMP distort the
market – will it be kept?
• No clear trend regarding being either a large
importer or a large exporter
• Exchange rates and world prices impact this
status
Brazil’s role regarding dairy trade

13. • Consumption will growth less in the future
• Production will also growth less in the next
years
What can we expect?

14. But important changes are happening

15. Dynamics after 2007
00
50
100
150
200
250
300
350
400
450 1/1990
10/1990
7/1991
4/1992
1/1993
10/1993
7/1994
4/1995
1/1996
10/1996
7/1997
4/1998
1/1999
10/1999
7/2000
4/2001
1/2002
10/2002
7/2003
4/2004
1/2005
10/2005
7/2006
4/2007
1/2008
10/2008
7/2009
4/2010
1/2011
10/2011
7/2012
4/2013
1/2014
Food Price Index
Meat Price Index
Dairy Price Index
Cereals Price Index
Oils Price Index
Sugar Price Index
Source: FAO

16. Land values rising – Brazilian example (R$/ha)
Source: FNP/Estado de S. Paulo (2013)
NORTH; 2.089
NORTHEAST; 3.112
MIDWEST; 5.748
SOUTH; 14.117
SOUTHEAST; 11.714
BRAZIL; 6.995
0
2000
4000
6000
8000
10000
12000
14000
16000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
R$/HA
+70%

17. Land opportunity costs – Brazilian example on
sugarcane areas
• OPPORTUNITY COSTS – SÃO PAULO STATE
• -2003 - U$ 180,00/ha = equal to a profit of R$ 0,09/L,
considering 3.500/kg/ha/year.
-2010 - U$ 625,00/ha = R$ 0,10/L, considering
10.000/kg/ha/year.
This effect puts pressure on dairy productivity
Source: Roberto Jank Jr. – Interleite (2011)

18. Fonte: Cepea/USP e IBGE (2013)
Minimum wage and milk prices (1991 = 100)
779
393
Valores nominais
0
100
200
300
400
500
600
700
800
900
1000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Minimum Wage Milk Price
410
889

19. Growing interest on robot milking

20. Survey on number/profile of dairy producers
• 48 dairy companies
• June/July 2013
• 17,5 million liters/day
• 30% of inspected production

21. Survey on number/profile of dairy producers
Considering total inspected production
Number of Producers Volume
Ranges liters/day Number % Liters/day %
Up to 250 168.463 67% 14.062.050 23%
250-500 46.637 19% 12.679.935 21%
500-1000 22.668 9,0% 12.432.707 20%
1000-3000 10.821 4,3% 13.668.693 22%
More than 3000 2.194 0,9% 8.357.996 14%
Total 250.782 100% 61.201.381 100%
Average: 249 kg/day

22. Official data 2005/2006 x our survey
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
2005/2006 MilkPoint/Leite Brasil 2013
Producers selling the milk x our survey

23. Official data 2005/2006 x our survey
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
2005/2006 MilkPoint/Leite Brasil 2013
Producers selling the milk x our survey
Every 6 minutes a
producer left the
business!

24. • Population income raised and unemployment rate fell steadily to
less that 5%  higher consumption but also labor and sucession
challenges in farms
• Higher land opportunity costs  improve productivity or leave
• Investments in processing capacity  aiming domestic market
and exports
• Import tax shielded (to some extent) Brazilian market to what was
happening in the world  artificially high internal prices
• But production lagged behind consumption  market were tight
and industries were pressured
Dynamics after 2007

25. 0.500
0.600
0.700
0.800
0.900
1.000
1.100
1.200
1.300
Real increase in milk prices
Source: MilkPoint/Cepea (2013)
R$/liter (inflation-corrected)

26. • Averages hide a big range in prices received by dairy farmers
• Within the same region, there may be producers getting R$
0,80/liter up to R$ 1,30/liter
– Volume
– Quality
– Influence, etc
• Are they in the same business?
• Efficient large farmers do have a good business!
Dynamics after 2007

27. Top 100 grew nearly 10% in 2013

28. New investments going on – Southeast Brazil

29. New investments going on – Midwest Brazil

30. New investments going on – Northeast Brazil

31. Progressive producers – South Brazil

32. Midwest Brazil

33. South Brazil

34. Small producers with family labour also growing

35. Small producers with family labour also growing

36. •How long it will last for?
But...

37. Real retail prices for a mix of dairy products
0.00
0.50
1.00
1.50
2.00
2.50
3.00
1.9.06
1.11.06
1.1.07
1.3.07
1.5.07
1.7.07
1.9.07
1.11.07
1.1.08
1.3.08
1.5.08
1.7.08
1.9.08
1.11.08
1.1.09
1.3.09
1.5.09
1.7.09
1.9.09
1.11.09
1.1.10
1.3.10
1.5.10
1.7.10
1.9.10
1.11.10
1.1.11
1.3.11
1.5.11
1.7.11
1.9.11
1.11.11
1.1.12
1.3.12
1.5.12
1.7.12
1.9.12
1.11.12
1.1.13
1.3.13
1.5.13
1.7.13
1.9.13
1.11.13
Composto Varejo Composto Indústria ProdutorFonte: CEPEA, MilkPoint; Elaboração: MilkPoint
R$/liter – inflation corrected

38. Industry lost margin to producers and retailers
0.93
0.86 0.86
0.95 0.94
1.04
0.76
0.78 0.77
0.67
0.62
0.71
0.61
0.64
0.59
0.64
0.71
0.75
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
2008 2009 2010 2011 2012 2013
% Produtor
% Indústria
% Varejo
Fonte: CEPEA e MilkPoint (2013)
Inflation-corrected values for a mix of UHT, pasteurized, powder milk and cheese

39. Some relevant processors facing problems
Solvency problems
Coop sold 50% to Vigor -
JBS
Board authorized to sell
dairy assets

40. New players studying Brazil, but only a minor deal ocurred

41. What to expect?

42. • Large price ranges will continue
• This, coupled with opportunity costs, will lead to a
structural change in production
• Many will leave the business, but production will keep
growing
• How many will be producing milk in 10 years? Good
question!
• Production will grow less – 2-3% in average, compared
to >4% from 2007-2013
• Brazil will still be an opportunistic exporter and a minor
importer, unless...
• Import taxes are removed (if so, the change will be more
dramatic and faster!)
What to expect?

43. Farming trends
 Consolidation
 Technology adoption
 Higher productivity
 Automation
 Irrigation
 Integration with agriculture
 Investments
 Improved services
 Management/information
 “sharemilking” systems?
 Labour challenges
 Management challenges
 Environment/manure mngt.
 High costs/volatility
 Animal welfare/milk quality
But...there are broader challenges:
 Policies
 Exporting agenda
 Dairy chain coordination

44. Gracias – Obrigado – Thank you!
Marcelo P. Carvalho
19 99187-4922
mpc@agripoint.com.br