Financing The Dairy Supply Chain

World Bank (IFC) ESADA 12th African Dairy Conference

August 31st 2016

IBRD International Bank for Reconstruction and Development

IDA International Development

Association

IFC International

Finance Corporation

MIGA Multilateral

Investment and Guarantee Agency

To promote institutional, legal & regulatory reform

Governments of poorest countries with per capita income less than $1,025

- Technical assistance - Interest Free Loans - Policy Advice

To promote private sector development Private companies in member countries

-  Equity/Quasi-Equity -  Long-term Loans -  Trade and

Commodity Finance -  Risk Management -  Advisory Services

To reduce political investment risk Foreign investors in member countries - Political Risk Insurance

Est. 1945 Est. 1960 Est. 1956 Est. 1988

Role:

Clients:

Products:

To promote institutional, legal & regulatory reform

Governments of member countries with per capita income $1,025 - $6,055.

- Technical assistance - Loans - Policy Advice

Shared Mission: To Boost Shared Prosperity and End Extreme Poverty

IFC is a Member of the World Bank Group

2 CONFIDENTIAL

Corporate Financial Services Buy Side Advisory

§  Assist clients to assess and select potential markets for entry/expansion at a regional, country and city level

§  Identify short lift and select tarts for acquisition and partnership §  Support valuation §  Negotiations and transaction execution up to deal closure

Sell Side Advisory

Corporate Advisory §  Assist clients to optimize financing structures and attract third party funding, advise on balance sheet

restructuring and value realization strategies, prepare clients for IPO

3

Lack of Financing The sector tends to lack financing especially value chain financing

Why WE LOVE DAIRY AS EMERGING MARKET INVESTMENT

Solid Growth Emerging markets are the dairy industry new life

Small Farmers Complex supplies chains often time includes thousands of farms

Fewer Environmental Issues (child labor, water use, food safety)

Nutrition Dairy is proven to be a key component to a balanced diet especially in early childhood

Steady Income Stable financials generally both on processor and farming side with stead income coming from daily milkings

5

A Unique Platform for Partners: Present in Every Region with 109 Offices and Active Along the Dairy Value Chain

(Colombia -$20mm) Alqueria

Ecuador - Reyleche and Lacteos Toni

(Dom. Republic - $15mm) Rica

(Uruguay - $90mm) Conaprole

(Cote d’Ivoire - $6mm) SIALIM

(Poland - $2mm) BONA

(Hungary - $3mm) ERU Hungaria

(Turkey - $39mm)

Pinar SUT Mis Sut Sanayi

(Bangladesh - $7mm) PRAN Dairy

(India - $15 mm) Parag Dairy

(Vietnam - $8mm) Foremost Dairy

(Philippines) Alaska Milk

(China - $15mm) China Dairy

(Mongolia - $2mm) Suu Dairy

(Russia - $9mm) Campina

Represents IFC office locations

Argentina ($112m) -  Milkaut -  Milkito -  SanCor -  AUTCL

-  Mastellone

(Uganda - $8 million Pearl Dairy )

IN Process: Bolivia: 1 Panama: 1 Egypt: 1

(Iraq - $18mm) Al Safi- Danone

(Mauratantia- $6mm) Tviski

(Pakistan - $45 mm) Friesland Campina

IFC’s Selected Agribusiness Investments in Dairy

Alqueria Colombia

Loans: $15 million Equity: $5 million

Capacity expansion

efficiency improvements and cost reduction.

2009

Conaprole Uruguay

3 Loans: $90 million

Relocation of existing plants. Construction of a new powder milk plant.

2002, 2007, 2012

Pran Dairy Bangladesh

Loan: $7 million

Expansion of production and processing capacity ,

and working capital.

2011

Suu Dairy Mongolia

Loan: $2 million Expansion of production capacity, develop milks

supply chain and upgrade cooling points; establish 2

mini-processing plants.

2011

6

Parag Dairy India

Loan: $15 million

Construct whey plant, UHT plant, and chilling centers

along with increased supply.

2013

Industrial Milk Company Ukraine

Loan: $30 million

Expand and modernize dairy operations and

storage capacity. Expand cropping operations.

2013

Arla AFISA Argentina

Loan: $30 million Syndication: $26 million

Expansion of whey processing and permeate drying capacity for whey protein dairy products.

2015

Pearl Dairy

Uganda

Loans: $8 million Greenfield powder milk

processing facility, supported by local farmer sourcing

activities.

2014

Opportunities in Dairy Continue to Shift Towards the Emerging Markets

7

§  The dairy value chain has a substantial GHG footprint

§  There is wide variance in productivity in developed versus developing markets

§  To improve profitability and reduce business risk, players are increasingly focused on resource efficiency improvements in their supply chains

Key Challenges Key Barriers

§  Access to affordable capital

§  Access to appropriate technologies including chilling and proper testing and food safety

§  Technical assistance and training

§  Diversified ownership of farms

§  Lack of market driven anchor dairy processor

§  Lack of farm level management skills

Emerging markets are growing between 5 to 8 percent; strong regional players are emerging.

IFC Role in Climate Smart Ag Investing Dairy GHG Breakdown

8

Dairy Value Chain Intervention Points - “Farm to Fork” Resource Efficiency Opportunities

9

Addressing the issues of water scarcity, waste, energy access (including diesel offset) through the following interventions…..

§ Green buildings

§ Certification of EE and lower GHG (branding value)

§ Food safety certification with better cold chain management

§ Green buildings

§ Fleet/logistics

§ LED lighting

§ Cold chain management

§ Water efficiency

§ EE boilers,pasteurizers, dryers

§ Wastewater treatment

§ Energy efficient refrigeration

§ Cleaner production

§ LED Lighting

§ EE chillers

§ Off grid solution to cooling

§ Co-generation

§ Energy Storage

§ Water efficiency

§ Energy efficiency

§ LED Lighting

§ Solar fencing

§ Methane digesters

§ Water efficiency & Irrigation

§ Milk cooling & transportation to collection center –reduce losses

§ Pasture irrigation

§ Animal Health

§ SupplementalFeeds

§ Right Genetics

InputsFarming &

Animal Husbandry

Collection Centers Processors Retail

Note: Color coding is as follows: Resource Efficiency, Renewable Energy, Waste, and Water. CONFIDENTIAL

Presentation Title

Large Opportunities exist for further dairy industry development in BRIC over the coming 5 to 10 years. Longer term Africa will expand market size as disposable incomes increase.

Dairy GROWTH Opportunities

Ethiopia

Kyrgyzstahn

Senegal

China

India

Turkey

Russia Poland

Indonesia

Mexico

Chile Peru Turkey

Vietnam

Ecuador

Sri Lanka

Pakistan

Kenya

Romania Uruguay Paraguay

Bulgaria Ghana

Boliva

Jordan

Tanzania Macedonia

Uganda

Rwanda

Botswana

Panama Egypt

Brazil US German France Netherlands Australia Spain Japan Ireland Portugal Greece Finland Denmark

South Africa

Large Market Size

Small Market Size

Positive Market Growth Negative Market Growth Myanmar

Immediate growth will start in the dairy production hubs in East Africa and where the cows are. Longer term export to non-dairy countries will develop but only after quality partnerships are developed and consumers trust regional brands.

§  GDP per capita growth in emerging markets is driving growth and milk demand

§  Packaging is critical for opening up new emerging markets and reducing waste

§  Processors are key to any successful dairy value chain

§  EBITDA margins range from 20-30% for value added milk products in emerging markets

§  Critical cooling systems in place, preferably managed by the company

§  Increase milk production per cow (triple is goal)

11

Production/Farmers

Dairy Hubs/ Collection

Processing Products

and Packaging

Markets

Interventions Along The Dairy Value Chain

IFC can support companies to grow along the value chain CONFIDENTIAL

§  Company has processing capacity of 100,000 liters/day of raw milk (value add) to 1 million per day (powder)

§  Focus on the domestic market first

§  Revenues are a multiple of 2.0 to 3.0 of raw milk cost

§  Gross margins at 20% and above

§  Preferably no dependence on exports subsidies, tariff protection, imported milk powder, or where the cost of milk is too high and cannot compete at parity with imports

§  Location of plant to milk production area is key to delivering fresh, safe, quality milk to consumers. Depending on outside ambient temperature rule is: in 4 hours from time of milking to time processing, milk should be chilled to 4 degrees Celsius

§  Milk loss is generally between 0.5% (developed markets) to 2.5% (less developed markets)

§  Usually top three current market share player unless value added niche market

IFC Deal Criteria in Dairy Projects

12

CONFIDENTIAL

13

Keys to Success

Value-added Dairy Products

▪  Processed dairy products generally contribute to higher margins and are less vulnerable to sharp decline in demand. Pasteurized and UHT milk are generally not attractive markets with very low margins that companies pursue just to complete range of products and dilute fixed costs;

14

Whey Powders: The New Long Term Growth Story in Dairy

15

Keys to Success

Value-added Dairy Products

▪  Processed dairy products generally contribute to higher margins and are less vulnerable to sharp decline in demand. Pasteurized and UHT milk are generally not attractive markets with very low margins that companies pursue just to complete range of products and dilute fixed costs;

Brand and Distribution System

▪  Brand positioning and reputation are crucial. Dairy processors should have full product traceability and crisis management and recall system

▪  Distribution costs can be significant, notably for chilled and frozen goods where temperature control is essential through the supply chain.

▪  Close relationships with farmers and adequate collection mechanisms are important to ensure availability and quality of the raw milk (chilled milk is essential)

▪  Efficient production of raw milk results in low costs and sustainability of the farms ▪  In more advanced markets, companies pay a base price for the milk plus bonus for quality (solids,

fat, antibiotics, etc); ▪  Prospects of scaling farm size leads to better competitive advantage and access to financing is key

▪  Due to time to market, transport and distribution costs, companies should aim to focus on the local market. Export could be considered for very efficient low cost producers (mainly Uru, Arg);

▪  Markets tend to be 30% traditional players (IFC clients), 30% raw milk consumption (BIG OPPORTUNITY),

Market (Domestic Vs.

Exports)

Raw Milk Sourcing

Dairy industry is political and often involves protectionist policies of governments •  Beware of dependence on tariff protection, subsidy, and regulated raw milk prices. •  Political environment and government policies to the sector play a major role in the industry (major

risks are minimum price to be paid to farmers, price controls for final products, sanitary barriers, etc);

No Dependence on Protectionist

Policies

16

Other Topics to Consider Outsourcing vs.

Integrated Model

Operational efficiency favors outsourcing, but need for quality control can support integrated processing

▪  Upstream investment in cow farms is not necessarily cheaper if producers can secure good terms with milk suppliers

▪  Meanwhile, quality control along the entire supply chain including breeding, vaccination and feeding of animals is critical for easily perishable dairy products

UHT vs. Pasteurized

Milk

Ultra High Temperature (UHT) milk products are becoming more wide spread as they alleviate the need for refrigeration ▪  Consumers are increasingly shifting to UHT milk given the competitive pricing, longer storage life and the

enhanced convenience (less need for refrigeration) of the product ▪  Rising demand for UHT milk removes the need for comprehensive cold storage networks and expands the

potential market accessible for dairy processors ▪  As super/hiper markets gain market share (vs. mom and pop), they tend to develop own brands (mainly

low value products) that compress margins for the sector

3 main drivers to consider: 1)   MILK, MILK, MILK => access to sufficient raw milk to support growth at competitive cost. This implies

assessing the milk basin adjacent to the company’s plant/s, competitive position vis a vis other processors (including black market), historical relationship with farmers (TA, financing increase loyalty), Gov policies, farmers economics (are farmers making money?, what are their alternatives?);

2)   BRAND => dairy are sensitive consumer products, hence brand reputation and positioning is the most valuable asset for a company. Leaders are able to command price premium

3)   DISTRIBUTION => sometimes 2nd cost item after milk. Capacity to source raw milk and distribute final products efficiently and with a high numeric distribution are key main success factors

§  Milk Collection Not Controlled By Processor

§  Government Interference in the Sector (Argentina and Russia)

§  Weak brand and marketing does not allow for passing on the cost when milk prices increases

§  Commodity Product in Non-Competitive Country (UHT)

§  Wrong Product for the Wrong Market (UHT vs Fresh Pasteurized)

§  Vertical Integration/Too Much Investment in Dairy Production (BRIC perhaps)

§  Raw Milk Price Too High (Lack of Feed, Conducive Climate and Adequate Pastureland)

§  Cooperative with Poor Corporate Governance (Owned and Managed By Member Farmer)

§  Second Hand/Poor Quality Equipment Leading to Downtime and Poor Operating Efficiency

§  Financial Wizards Leading the Investment Rather than Technical Dairy Specialist

§  No Skin in the Game/No Previous Experience in Dairy (Politically Driven Projects rather than Commercially Driven)

Why do projects not work?

17

CONFIDENTIAL

Nuts and Bolts of Farmer Financing

•  In the normal course of business, dairies collect data related to individual suppliers (amounts of milk produced, fat content, protein content, bacteria/somatic cell count).

•  Using a credit bureau like approach, the amount of data collected by dairies should be sufficient to create a “performance rating” similar to a credit score.

•  The data collected from the dairies could be matched with data available from other sources to improve the reliability of the performance rating.

•  If implemented correctly, such a performance rating could predict how a certain supplier will perform in the future.

•  In cooperation with the dairy-buyer, this performance rating could be used to establish credit limits for farmers (if suitable).

•  An eligible famer would receive a loan from a partner financial institution for buying eligible products like chillers/bulk tanks, cows, vet supplies, milking equipment as prioritized in cooperation with the local processor. The loan would be repaid with milk deliveries over a tenor of up to [three] years.

How would it work?

DATA

Performance Rating

Loan

Milk Payment

Loan (Re)Payment

Equipment Purchase

BANK or Microfinance Institution

DAIRY

FARMER

How to Pilot Performance Ratings •  Select 2-3 markets which meet the following conditions:

§  Growing milk demand, §  Good economics (payback periods) for capital investments by dairy farmers, §  Financially strong diaries interested in cooperating with IFC and increasing milk quality and quantity, §  Reliable suppliers for relevant equipment are present in the market.

•  Raise donor funds in the amount of: §  Up to US$ [1] million to develop a performance rating methodology and actual ratings §  Up to US$ [6] million as first loss for lending based on performance ratings

•  Identify 2 companies with a strong track record in evaluating data for credit risk analysis to develop a performance rating methodology ratings for selected suppliers.

•  Implement the financing mechanism with one or several dairies and 1-2 financial intermediaries (FIs). The criteria for FI selection would primarily be the ability to serve most of the milk suppliers of a dairy and good processing skills.

•  Test the reliability of the performance ratings with reasonably small pilot portfolios and monitor the outcome closely. Likely, the pilot (< US$ 1 million) will have to be fully funded with donor funds as the banks will not trust the mechanism.

•  One or two re-designs of the ratings will likely be necessary. During the second and third iteration, the financed amounts should grow and banks should, with a substantial first loss on a portfolio basis (20-40%), assume some of the credit risk.

•  Once the reliability is sufficiently high (NPLs in low single digits), incentivize local financial intermediaries to apply the performance ratings. Probably, first loss would still be needed for introducing a new FI to performance ratings but the first loss should only be around 5-10%.

•  Replicate the approach in other countries after necessary local adaptations!

21

Company Strategy

Geographic Focus Africa (Kenya, Uguanda, Ethiopia, Tanzania, Morocco, Tunisia, Rwanda, and Zambia)

Regional Players Clover, Pearl, Brookside

Multinational Players

Arla, Danone, Lactalis, Nestles, Saputo, Schreiber Foods ?? Fonterra, FC, LOL

Product Focus Liquid milk only if top or better player in the market, value added (yogurt, flavored milk, whey based drinks, infant power, whey as food ingredient, cheese)

Waste  Management/Climate  Smart  Technologies  -­‐  Zero  Carbon  Dairy  Farms  (no  2ll,  unique  grass  mixes  for  

forage,  intensive  produc2on  per  cow,  new  breeds  adapted  to  tropical  climates  using  embryo  transplant  technology)  

Thank you

Thomas Lee Bauer Senior Industry Specialist

22

Annex

23

Dairy – Conaprole (Uruguay)

§  Cooperativa Nacional de Productores de Leche (“Conaprole”) is Uruguay’s leading dairy producer, sourcing from over 2,000 farmers to capitalize on natural competitive advantages in dairy (exporting 55% of volume as milk powder)

Company

§  $30 million loan (2002): $108 million expansion and renovation of dairy product facilities

§  $30 million loan (2007): $62 million relocation and expansion of processing facilities

§  $30 million loan (2012): increase processing capacity at 2 facilities, increasing raw milk purchases by 33%

Investment Transactions (3)

IFC Advisory Services

§  Farmer Suppliers: ~2,300 farmers §  Employment: over 2,000 employees §  SME linkages: 17,000 retail outlets

Development Impact

24

§  Long-term loan not available in local market §  Institute environmental and social best

practices and guidelines §  Farmer Linkages – improve farmer

productivity via technical assistance program

IFC Role §  Since 2008, IFC has been working with

Conaprole to train 350 farmers to improve production and management practices

§  Average of 25% increased productivity §  Rolling out to include an additional 350

farmers, in a replicable success story §  Also worked with Conaprole to improve energy

and water efficiency practices

Dairy – Suu Dairy (Mongolia)

§  Suu Dairy is a leading dairy company in Mongolia, which required production expansion to keep up with growing demand.

§  Sources from over 4,000 farmers the Company’s increased production volume

§  Currently around 25% of Mongolia’s processed dairy products are imported

§  Company recently completed TetraPak line expansion.

Company

§  IFC Investment: $2 million loan

§  Commitment: May, 2011

§  $9.1 m expansion of facilities to expand production capacity, limited by packaging capacity. Renovate existing equipment and processing facilities

§  Further develop raw milk supply chain with new milk collection centers and upgrade existing ones

§  Project supports economic activities in rural areas, especially herders, through its milk sourcing arrangements.

Transaction

§  Long-term loan not available in local market §  Improve food safety and quality management

systems; obtain ISO certification §  Institute environmental and social best

practices and guidelines §  Improve efficiency of formerly state-owned

enterprise

§  Farmer Linkages – improve farmer productivity via technical assistance program

IFC Role

§  Employment creation: 250 direct jobs; 250 contractors §  SME linkages: 19 collection centers;100+ distributors

Development Impact

25

New Hope Dairy (Sichuan and Yunnan, China)

“North Andre Traceability and Farm Improvement Program/Apple juice concentrate” ü  #of beneficiaries: 200 producers and MHD staff

( train the trainers) Components Development of the Sichuan Hong Xing Demonstration

Farm: to improve farm management, animal husbandry techniques and feeding regimes

Development of a Technology Transfer Programme : In

addition to receiving technical information from foreign and local dairy experts, local trainers received training about how and where to find information about new technologies.

Establishment of the New Hope State of the Art Dairy

Facility: not to support NHD production but to help local farmers to learn farm management and new dairy technology, as well as providing good quality calves to local farmers

26

New Hope Dairy (China) – Main results

ü  Net income (considering costs to implement best practices):

•  Increase in 45% of annual net income per household (US$ 455 vs. US$315) ü  Increase in firm’s productivity:

•  On average, there was an 11% increase in milk yield. •  50% of participants reported between 11- 20% increase in milk yield.

ü  Cost /benefit analysis:

•  As a result of the income increase, each dollar of the Technical Training expenditures generated a gross return of $2.70 or a net return of $1.70.

Main lessons learned

ü Tailor training and mentoring according to individual farmers’ needs.

ü  Reach out and encourage more women to participate in the project.

ü  Increase cooperation with the client company and local government to improve positive enabling environments for farmers to apply new knowledge and practices.

ü Changing perception and gaining new knowledge does not make people automatically alter their behavior, unless resources enable them to do so.

27