The Quest for Protein: Challenges and Opportunities

The Quest for Protein: Challenges and Opportunities Protein Trends & Technologies Seminar Will Sawyer Vice President, US Animal Protein Research May 5, 2015

Key Themes for Global Protein Who is Rabobank? What is the Rabobank Food & Agri Research team? Rabobank Global Overview Shifting drivers of animal protein consumption growth Animal protein production surplus in the America s Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts PEDv learnings two years in PRRS Bird Flu a global issue with varying implications 2

Key Themes for Global Protein Who is Rabobank? What is the Rabobank Food & Agri Research team? Rabobank Global Overview Shifting drivers of animal protein consumption growth Animal protein production surplus in the America s Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts PEDv learnings two years in PRRS Bird Flu a global issue with varying implications 3

Rabobank s Food & Agri Research (FAR) team with global animal protein research coverage Source: Rabobank 4 4

Rabobank Animal Protein Team St. Louis, USA Don Close FAR Senior Analyst Atlanta, USA Adriaan Weststrate Global Sector Co-Head Micki Donegan US Poultry Relationship Manager Will Sawyer FAR Analyst New York, USA Juan Manual Fernandez Mergers & Acquisitions Bill Cordingley FAR Global Sector Strategist Utrecht, Netherlands Jeroen Leffelaar Global Sector Co-Head Nan-Dirk Mulder FAR Senior Analyst Gorjan Nikolik FAR Senior Analyst Albert Vernooij FAR Analyst Shanghai, China Sandy Chen FAR Senior Analyst Hong Kong Chenjun Pan FAR Senior Analyst Singapore Pawan Kumar FAR Senior Analyst Mexico City, Mexico Pablo Sherwell FAR Senior Analyst Sydney, Australia Angus Gidley-Baird FAR Senior Analyst São Paulo, Brazil Adolfo Fontes FAR Analyst Buenos Aires, Argentina Paula Savanti FAR Senior Analyst Christchurch, New Zealand Matthew Costello FAR Analyst 5

Key Themes for Global Protein Who is Rabobank? What is the Rabobank Food & Agri Research team? Rabobank Global Overview Shifting drivers of animal protein consumption growth Animal protein production surplus in the America s Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts PEDv learnings two years in PRRS Bird Flu a global issue with varying implications 6

Global Animal Protein Consumption Growth: Poultry to Overtake Pork by 2020 Global Animal Protein Consumption (million tons) and CAGR 130 +1.1% 120 110 100 +1.9% +2.0% +1.7% +2.3% +2.3% 90 +4.2% 80 70 +3.9% +1.4% +0.6% +1.3% 60 +1.0% 50 Source: OECD-FAO 7

Animal Protein Consumption Growth Globally and in China Global animal protein demand excl. China (000s of MTs) China animal protein demand (000s of MTs) 80,000 CAGR: +2.2% 80,000 70,000 70,000 60,000 CAGR: -0.3% CAGR: +0.3% 60,000 CAGR: +2.8% 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 CAGR: +0.5% 10,000 10,000 CAGR: +1.1% 0 Beef Pork Chicken 0 Beef Pork Chicken 2010 2011 2012 2013 2014 2015f 2010 2011 2012 2013 2014 2015f Source: USDA Source: USDA 8

The new reality: Emerging markets drive global growth Change in Poultry Consumption from 2010 to 2014 x 1,000 tonnes 3,500 3,000 First tier: BRIC + EU 43% Second tier: 38% Other : 19% 2,500 2,000 1,500 1,000 500 - Source: Rabobank/USDA, 2015 9

Growing Animal Protein Trade Major Animal Protein Exporters (000s tons) 30,000 Major Animal Protein Importers (000s tons) 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 0 Brazil US EU India (Beef) Australia (Beef) Canada (Pork) Other Japan Russia China (w/ HK) US (mostly beef) Mexico Korea Others 10

In developed markets: more cluck, less chuck On an indexed basis, chicken consumption in these developed markets is up 8-15% since 2007 while beef consumption is down 9-13% We attribute this trend to the rapid rise in beef costs relative to chicken and the health and wellness perception of chicken over beef 120 115 110 105 100 95 Canada European Union United States Canada 90 85 European Union United States 80 2007 2008 2009 2010 2011 2012 2013 2014 Source: USDA 7 11

Key Themes for Global Protein Who is Rabobank? What is the Rabobank Food & Agri Research team? Rabobank Global Overview Shifting drivers of animal protein consumption growth Animal protein production surplus in the America s Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts PEDv learnings two years in PRRS Bird Flu a global issue with varying implications 12

PEDv Has Been a GLOBAL Outbreak US -Discovered in the summer of 2013 and PEDv cases are still happening Canada - Few cases but pockets of Ontario have been hard hit Ukraine -First cases in spring of 2014 and the outbreak seems to be small. -Raises the risk of spreading to the EU Japan - Has lost 200K pigs to PEDv or about 1.2% of annual production Mexico - Outbreak in the fall of 2013 with likely the largest losses in the world Peru and Colombia - Few cases identified but it has raised fear in the minds of consumers Korea - Significant outbreak in 2013/14 through about a quarter of the industry 13

PEDv Took the US Pork Industry By Storm in 2013 and 2014, but Far Fewer Cases So Far in 2015 PEDv Cases per Week 350 Change in Barrow/Gilt Slaughter, Year-over-year 10% 300 5% 250 200 0% 150-5% 100 50-10% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -15% 2013 2014 2015 14

Hog Prices More Than Offset the Short Supply Bringing Profit Margins to Historic Highs Lean Hog Futures, USD per CWT $160 Hog Production Profit Margins, USD per Head $140 $140 $120 $100 $120 $100 $80 $60 $80 $40 $60 $40 $20 $20 $0 ($20) ($40) $0 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 ($60) Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 15

In Dealing With PEDv... Don t be Dense! 16

Global Poultry Consumption Growth Consumption CAGR Historical (2010-2015) and Forecast (2015-2020) +1.7%+1.5% AI +4.7% +3.3% Canada +2.9%+3.0% +2.5% +1.4% Slow 0% to 2% Moderate 2% to 4% Fast Mexico US AI 4% PLUS AI +5.4% +2.6% Colombia +3.9% +1.2% +0.6% +3.2%+3.0% Brazil +1.2% +1.5% +0.9% EU-28 +4.1% +1.0% +3.0% +3.6% Sub-Saharan Africa South Africa AI Turkey AI +8.0% Saudi Arabia Russia +4.8% +1.5% +0.5% India +3.7% +3.6% AI Share of Sales Through Wet Markets 55% 55% 75% 83% 93% China +2.1% AI +4.0% Indonesia +0.1% -0.1% +5.4% +3.8% +2.6% Australia Japan +2.5% Thailand AI Source: USDA for Historical, Rabobank Forecast Argentina 17

Bird Flu Spreading in the Midwest, But Primarily in Turkey PACIFIC FLYAWAY: A number of chicken and turkey farms affected in December and January MISSISSIPPI FLYAWAY: Bird flu has spread into the Midwest but nearly all cases are in turkey farms 18

China s chicken consumption has been stalled by AI outbreaks, food safety - producers are curbing growth Chicken consumption grew steadily from 2000 through 2012 but the severe outbreaks of AI over the last 18 months has caused poultry consumption in China to stagnate We expect consumption to continue to grow once the disease issues in China can get under control Chicken producers have slowed their rate of breeder imports to address the more challenging environment Per capita chicken consumption (lbs per annum) 23 22 21 20 19 18 17 16 15 Imports of white feathered bird breeders (MM sets) 2.5 2.0 1.90 1.71 1.49 1.49 1.5 1.35 1.21 1.10 1.0 0.5 14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0.0 2009 2010 2011 2012 2013 2014 2015E Source: USDA Source: USDA 19

Bird flu was worse last year than in 2013, what about this year? 20

Sales Trends at YUM China and Local Producer Profitability Reflect the Challenging Consumption Environment 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% December 2012: KFC hormone scandal Spring 2013: Bird Flu Outbreak July 2014: OSI expired meat scandal Spring 2014: Bird Flu Outbreak 2.0 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Average EBIT Margins of Public Companies in Relevant Markets 13.0% 9.0% 4.8% 6.3% 6.0% 5.9% 6.3% 3.6% 8.2% 4.9% 4.8% 0.3% -2.6% 2.2% -6.2% -4.1% 2007 2008 2009 2010 2011 2012 2013 2014 YTD US China Sources: US: Tyson chicken, Pilgrim US, Sanderson Farms China: DaChan, Fujian Sunner, Henan Huaying 21

China s Imports of Chicken Have Stalled as Beef Exploded 000s of metric tons on a CWE basis 3,500 3,000 480 2,500 495 516 2,000 648 554 1,160 1,360 Chicken Pork 1,500 635 1,169 Beef 1,000 500-581 654 697 1,144 1,190 586 441 1,055 1,265 762 1,110 639 885 483 311 330 340 97 99 102 124 177 194 181 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 22

Short to Medium Term Outlook for China Chicken Consumption to Grow Consumption to be Flat or Decline 23

Key Themes for Global Protein Who is Rabobank? What is the Rabobank Food & Agri Research team? Rabobank Global Overview Shifting drivers of animal protein consumption growth Animal protein production surplus in the America s Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts PEDv learnings two years in PRRS Bird Flu a global issue with varying implications 24

Favorable Feed Costs Favors the America s $11 $10 $9 Asia (US Dollar per Bushel) $8 $7 $6 $5 $4 $3 America s $2 2008 2009 2010 2011 2012 2013 2014 2015 US - Futures Japan China - Jilin Brazil - Parana 25

Global Currency Wars Challenging US Exports 150 140 130 120 110 100 90 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 USD Index Brazilian Real Euro Mexican Peso Canadian Dollar 26

Post PEDv, the US Has Regained Its Price Competitiveness with the EU Despite the Stronger Dollar US and EU Hog Prices, USD per Pound $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 US EU 27

US Pork Exports Boosted by PEDv in 2014? What about in 2015? PEDV Markets US Pork Exports by Destination 000s of lbs 2013 2014 YoY Change Japan 1,230,585 1,137,030-7.6% Mexico 1,102,667 1,243,447 12.8% Canada 533,173 497,485-6.7% Korea 243,099 342,392 40.8% China (including Hong Kong) 603,420 432,057-28.4% Russia 17,230 102,633 495.7% Colombia 89,264 122,988 37.8% Other 719,664 586,027-18.6% Total 4,539,103 4,464,059-1.7% ex PEDv countries 3,104,072 2,755,231-11.2% 28

Challenges in US Chicken Trade 2014 US Chicken Exports by Volume In a protectionist move, Angola has revoked import licenses for chicken sharply curbing imports Banned ALL US poultry on the discovery of bird flu in the US Banned all US meat imports in August 2014 for one year, at least China w/ HK 7% Angola 7% Canada 5% Russia 4% Cuba 4% Taiwan 3% Iraq Philippines 3% 3% Georgia 3% Guatemala 3% United Arab Emirates 2% South Korea 2% Turkey 2% Vietnam 2% Ghana 2% Haiti 2% Kazakhstan 1% Chile 1% Congo 1% Limited chicken imports to areas outside of infected counties and only product into the further processing sector Mexico 21% Other 23% 29

Russia s Meat Ban Has Hurt the Russian s Most Russia s Banned Meat Imports Russia s 2013 Pork Imports 73% 72% 12% Of Russian Imports 14% 11% 3% Of Russian Consumption Poultry Pork Beef 4% 7% 1% Of Global Trade Quantity (tons) Share of Imports Total imports 619,765,142 100% Brazil 128,552,532 21% BANNED Denmark 89,062,640 14% BANNED Germany 82,723,369 13% BANNED Canada 79,360,469 13% BANNED Spain 35,487,629 6% BANNED Netherlands 30,085,134 5% BANNED France 27,283,194 4% BANNED Poland 22,897,414 4% BANNED Ireland 19,905,816 3% BANNED Belgium 18,754,818 3% Chile 17,201,024 3% Belarus 16,714,355 3% BANNED Hungary 15,152,254 2% BANNED Austria 10,503,957 2% BANNED USA 5,936,736 1% BANNED Finland 4,426,348 1% BANNED Ukraine 4,191,228 1% 30

US Leg Quarters at a Deep Discount to Mexico Prices Despite Appreciation of US Dollar US leg quarters a deep discount to Mexico chicken prices Peso/dollar appreciation and impact on US leg quarter prices MXN 50,000 75,000 120 115 MXN 40,000 65,000 110 Pesos Per Ton MXN 30,000 55,000 Tons 105 100 95 MXN 20,000 45,000 90 85 MXN 10,000 35,000 80 75 MXN 0 25,000 2009 2010 2011 2012 2013 2014 US-to-Mexico Exports US Leg Quarters Mexico Chicken 70 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Peso/Dollar Exchange Rate US Leg Quarter Prices (USD) US Leg Quarter Prices (Pesos) Source: GCMA, USDA Source: Bloomberg, USDA 31

West Cost Pork Blockage Pressuring US Meat Prices Long Beach Port Before the Work Stoppage After Work Stoppage 32

Key Conclusions for Global Protein A global leader in Food and Ag banking Poultry consumption continues to outpace other proteins but AI is a risk Rabobank Global Overview Competitiveness and Trade Disease Feed costs are key long-tem FX is causing important shortterm shifts Disease adding volatility to supply and prices 33

Will Sawyer Vice President, Animal Protein t. 404-870-8023 e. William.Sawyer@rabobank.com