Thomas Lee Bauer - Principal Industry Specialist ; International Finance Corporation U.S.A.

1. Financing The Dairy Supply Chain
World Bank (IFC)
ESADA 12th African Dairy Conference
August 31st 2016

2. 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

3. 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

4. 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. 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

6. 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

7. 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.

8. IFC Role in Climate Smart Ag Investing
Dairy GHG Breakdown
8

9. 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
§ Supplemental
Feeds
§ Right Genetics
Inputs
Farming &
Animal
Husbandry
Collection
Centers
Processors Retail
Note: Color coding is as follows: Resource Efficiency, Renewable Energy, Waste, and Water. CONFIDENTIAL

10. 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
RussiaPoland
Indonesia
Mexico
Chile
PeruTurkey
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 GrowthNegative 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.

11. § 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

12. § 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. 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. 14
Whey Powders: The New Long Term Growth Story in Dairy

15. 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. 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

17. § 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

18. 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.

19. How would it work?
DATA
Performance
Rating
Loan
Milk Payment
Loan
(Re)Payment
Equipment
Purchase
BANK or
Microfinance
Institution
DAIRY
FARMER

20. 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. 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)

22. Thank you
Thomas Lee Bauer
Senior Industry Specialist
22

23. Annex
23

24. 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

25. 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

26. 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

27. 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