“The most significant story in global pork markets has been the substantial decline in China’s imports in recent months, which creates a risk of over-supplied global markets,” says Chenjun Pan, RaboResearch Senior Analyst – Animal Protein. “However, we do expect China’s imports to pick up somewhat over the rest of the year.” While the Rabobank Five-Nation Hog Price Index suggests a stronger pricing trend, the major importing countries will likely maintain steady import growth.

China’s pork farming structure has been impacted by stricter environmental policy enforcement. Despite the exit of many small farms, we maintain our forecast for 2017, with production increasing by 2%. Prices will continue the downward trend, after holding at strong levels in summer. Pork imports were down by 27% in the first eight months, but may rebound over Q4 2017.

China’s import demand has been one area of distortion in global pork markets over the past one to two years, and a diversion in prices for certain cuts has been another. “Pork bellies have reached record levels in the US and some other markets, driven by strong demand, especially from foodservice,” says Justin Sherrard, RaboResearch Global Strategist – Animal Protein.

While high prices in 1H 2017 contributed to declining exports as they reduced the EU’s competitiveness in trade flows, they also triggered an expansion in the sow herd. The slight dip in production in 2017 is likely to reverse in 2018. The EU will seek export opportunities for additional production.

US pork production will continue to expand over the remainder of the year. Prices are expected to soften under supply pressure. Strong currencies will put extra pressure on the export business (see Figure 2). With weaker demand from China offset by stronger demand from Mexico, we still expect total exports for 2017 to be higher than in 2016.

Brazilian pork exports increased around 18% by value in the first nine months of the year. By volume, they declined around 4%, particularly due to the slowdown in Chinese pork imports. Given favourable feed costs, we expect Brazilian production to continue rising in Q4 2017.

• Leaving EU without a trade agreement could cost up to 18 per cent of UK GDP growth until 2030, compared to retaining EU membership

• Economic growth in the euro area to drop by 2 per cent by 2024 due to Brexit

• First study that integrally assesses the impact of Brexit on productivity, based on a UK-specific productivity model

The study uses macro-econometric modelling to assess the effects of the UK leaving the European Union in three possible scenarios –a hard Brexit where negotiations between the EU and UK do not lead to a trade agreement,– a free trade agreement (FTA), like that of Switzerland, and a soft Brexit where the UK remains part of the European internal market but exits the customs union. All three scenarios are benchmarked against a situation where the UK would continue to be a member of the EU (‘Bremain’). The study includes new elements compared to other studies and finds much larger effects.*
A hard Brexit would cost the UK 18 per cent of GDP growth by 2030, compared to a situation where the UK would retain its EU membership. This equates to £11,500 per British worker. By comparison, negotiating a new free-trade agreement would cost the UK 12.5 per cent of GDP growth by 2030, and 10 per cent of GDP growth if the country was to undergo a soft Brexit. This equates to £9,500 and £7,500 per British worker respectively.

For countries in the euro area, a UK departure from the European Union – however severe – would result in a cumulative impact on EU GDP of – 2 per cent by 2024. The economic impact on the Netherlands, which was looked into specifically by the Netherlands-based research team, will be higher than on most other EU member states because it has a much closer trade relation with the UK, accruing losses of around €25bn and €35bn.

Immediate impacts of Brexit
According to the Rabobank study, a hard Brexit outcome implemented in 2019 without a transition period would result in the UK economy immediately falling into a two-year recession period. For the FTA and the soft Brexit scenario there will also be a recession, but milder and much more short-lived.
If negotiations in Brussels result in a hard Brexit, UK GDP is expected to decline by -2.4 per cent following its departure in 2019. However, if the UK and EU were to agree on a freetrade agreement, a GDP decline of -1.1% would be expected, and a -0.3 per cent decline in a soft Brexit scenario.

Fluctuating trade activity
With the EU being the UK’s single most important trading partner, any ‘Brexit’ scenario would result in a slowdown of trade due to higher tariffs and custom controls. In the event of a hard Brexit, export volumes are estimated to be approximately 30 per cent lower than if the UK remained in the European Union, 15 per cent lower in a free trade agreement scenario and 10 per cent lower if the UK negotiates a soft Brexit.
Import volumes would also be impacted, with a hard Brexit resulting in a 27 per cent decline in goods and services coming into the UK. The effect would be 23 per cent in the event of a free trade agreement and 16 per cent in a soft Brexit scenario.

Impact on the labour market
The research shows an initial rise in unemployment figures, with a hard Brexit causing a jump from 4.6 per cent in 2018 to 6.2 per cent in 2020, but quickly returning to long term structural unemployment levels. In a Bremain scenario, Rabobank would anticipate unemployment to be stable, hovering at just above 4 per cent. In any Brexit scenario, long-term damage to the UK’s labour market is expected to be limited due to the dynamic nature of the UK labour market, with the research showing no indication that an exit from the European Union in any form will result in higher structural unemployment levels.
However, the research shows that labour-augmented technological change is anticipated to stall in any Brexit scenario, which implies that technology advances will affect fewer jobs compared to if the UK remains in the European Union.

Hugo Erken, senior economist at Rabobank, said: “There has been extensive economic research into the immediate effects of Brexit, but they have largely focused on trade and investment, whereas implications of the different factors that affect productivity is only marginally or partially addressed.” “By looking at dynamics such as innovation, competition, knowledge and human capital, how they will change and what affects this will have on the structural makeup of the UK and European economy, our research shows that the long-lasting impact of Brexit is likely to be more severe than initially anticipated.”
*Rabobank’s study uses an improved tariff version of the macro-econometric model NiGEM developed by NIESR, which does incorporate the negative impact of cost-push inflation on consumption resulting from imposed trade barriers between the UK and EU. They also estimate a unique total factor productivity model (TFP) for the UK, which assesses the specific impact on productivity caused by Brexit through determinants like innovation, competition, foreign knowledge and human capital.

“Global dairy markets remained buoyant into Q3 2017, be it with an ongoing theme of a record price spread between dairy fat and protein,” according to Michael Harvey, RaboResearch Senior Analyst – Dairy. “The outlook for commodity markets is for a balanced market to continue. Milk production across the export regions is revving up, and the pace will accelerate in the coming months, largely led by the imminent Oceania spring flush.” However, sustained buying from China should prevent the market from being overwhelmed in the closing months of 2017.

Regional dairy markets
EU
Despite ongoing issues in some key regions, the milk production growth rate is at its healthiest since 2016. Butter prices continue to shine, and milk prices are still improving.

US
The industry has now had a run of more than 40 months of consecutive milk supply growth and this is set to continue, albeit with regional variance.

New Zealand
Very wet weather across most parts of New Zealand has set challenging conditions for the start of the 2017/18 season. Provided conditions improve, we still expect strong milk production for the 2017/18 season.

China
Promotional activity is getting a positive consumption response. Coupled with weaker production, import purchasing has picked up strongly as anticipated, and this trend is expected to continue into 2018, albeit at a lower rate.

South America
A more solid rebound in milk production is underway across South America. The scenario for dairy consumption is less optimistic, given economic headwinds.

Australia
In Q3 2017, Australia milk production will have returned to growth, following seven quarters of consecutive declines. The 2017/18 season is forecast to deliver 2.5% growth, supported by improving farm profitability and favourable seasonal conditions.

In recent years, pulse farmers around the globe have benefited from improved pulse crop margins. And despite a collapse in prices since late 2016, they have not reduced the area farmed under pulses notably for the 2017/18 season—pointing to another year of plentiful global supplies and continued price pressure.

“Pulse markets are—and will remain—fragmented, made up of many different pulse categories, each with specific characteristics”, according to Stefan Vogel, Rabobank’s Global Sector Strategist – Grains & Oilseeds. “Supply can quickly outpace demand in the case of high prices (and thus increased plantings), while weather-related yield issues in a key producing country can drive prices upward in order to ration demand.”

India is the key to global pulse markets, both as a producer and importer, producing roughly 25% of the global output, consuming 30% of global use, and importing 40% of the global trade flows. Still, Indian per capita consumption of pulses is below that of the 1980s and provides further growth potential. The country’s large demand and the forecast continued import needs will benefit farmers in key exporting countries like Canada and Australia. Future demand growth in India will benefit from an ever-growing number of new products that contain pulses and the generally low price elasticity of pulses in India, which is well below that of substitutes like vegetables and livestock products, limiting the impact of high prices on consumption reductions.

Meat substitutes, derived from non-meat protein sources, are rising quickly in demand, especially in western regions, but also in Asia. Still, pulses only account for a surprisingly low share of the protein used in those products; soy proteins and wheat protein, as well as egg and dairy protein, make up the majority. Rabobank forecasts meat substitutes to show a strong future growth, but by 2025, the use of pulses for these products is forecast to account for only about 2% of all globally consumed pulses.

“The progress on our three strategic priorities demonstrates that our transition is impacting all parts of Rabobank. We are seeing customer satisfaction trending upwards, improved financial results and further balance sheet optimisation. However, we are not there yet: we need to do a lot more to keep pace with the rapid changes around us. We are now shaping the next phase of our own change agenda with even more emphasis on far-reaching digitisation and innovation. Our employees are crucial to effecting these changes and we greatly appreciate their hard work and professionalism.”

“Our customers are expressing ever-growing satisfaction with our service provision. In the Netherlands, we are seeing this trend mainly with retail customers and entrepreneurs. This reflects the hard work of our employees and the success of our focus on digitisation, innovation and sustainability. Very recently Rabobank announced that it will support Dutch poultry farmers who are affected by the use of a toxic insecticide on laying hens. Businesses which are essentially healthy can count on Rabobank to work with the poultry farmers to come up with solutions appropriate to their individual situation to prevent financial difficulties. In the first half of 2017, we were also involved in a number of major transactions for customers in food & agriculture. On 1 September, our new top management structure will come into operation . The bank will then be run by a Managing Board of ten members. The explicit representation of all key customer segments, digitisation and HR talent development in the Managing Board will give a vital boost to the Rabobank transition in all areas.”

“Net profit grew by 52% to EUR 1,516 million. The return on invested capital rose from 5.4% to 7.8%. Thanks to the favourable economic conditions in the Netherlands, loan impairment charges were extremely low. On balance, this item was EUR 67 million negative. The low interest rate on savings and the housing market dynamics in the Netherlands once again generated high levels of early mortgage repayments in the first half of 2017 (EUR 8.3 billion). Despite this development, net interest income increased by 2%, attributable in part to growth in the international businesses; net fee and commission income also rose. Adjusted for currency effects, the private sector loan portfolio declined by EUR 1.8 billion to EUR 417.8 billion in the first half of 2017. This was mainly due to our bringing down the non-core part of our commercial real estate loan portfolio and a rise in early mortgage repayments. The market share in mortgages remained steady at 20.5% (3% with Obvion). The inflow of savings from retail and private banking customers in the Netherlands caused private savings to grow by EUR 3.2 billion. Total deposits from customers were EUR 343.2 billion, down by EUR 4.5 billion on the level at year-end 2016 as a result of lower balances from corporate customers, which are by nature more volatile than private savings, and due to currency effects. The cost/income ratio improved to 67.6%, due to stable income development and cost reductions achieved through the efficiency measures in our restructuring programme. These measures were also reflected in a fall in the number of employees. In the first half of 2017, total staff level (including external employees) fell by 869 to 44,698 FTEs. Most of the efficiency measures planned for this year will take effect in the second half of 2017, with further job losses as a result.”

“The underlying operating profit before tax amounted to EUR 2,276 million (+12%). The calculation of underlying profit includes an adjustment for the fair value items (hedge accounting and structured notes), restructuring costs, the extra provision made in 2016 for compensating commercial customers with an interest rate derivatives contract, and for Athlon's income and expenses. Athlon was sold at the end of 2016.”

“Rabobank further optimised its balance sheet and strengthened its capital position in the first half of 2017. The fully loaded common equity tier 1 ratio was 14.7% (13.5%) on 30 June 2017. The transitional common equity tier 1 ratio increased to 15.0 % (14.0%). The total capital ratio was 25.5% (25.0%). This means that Rabobank has already achieved the capital targets we set ourselves for 2020, which we consider appropriate considering the uncertainty surrounding future capital requirements (Basel IV). The issuance of Rabobank Certificates in January 2017 added EUR 1.6 billion to the common tier 1 equity, with a rise in the common equity tier 1 ratio of around 80 basis points as a result. The capital ratios also benefited from the retained earnings and the reduction in risk-weighted assets. In the first half of 2017, the risk-weighted assets fell by EUR 3.6 billion to EUR 207.6 billion. In the context of strengthening and optimising the balance sheet, Rabobank conducted a transaction after the reporting date to further reduce the risk weighted assets by almost EUR 1 billion. This transaction involved transferring the risk of part of the corporate loan portfolio to a third party.’’

“For the first time in its history, Rabobank issued EUR 2.5 billion in covered bonds in May 2017. In future years, we will be able to issue covered bonds up to a total of EUR 25 billion, with a view to optimising and diversifying Rabobank's funding mix.”

“Our hard work on digitization and innovation is showing results and getting us noticed. In June, we joined the Digital Trade Chain, a consortium of seven European banks working to build a block chain platform for entrepreneurs. Rabobank is the only Dutch bank in this consortium. At the Dutch FinTech Awards 2017, Rabobank was voted most innovative traditional bank for FinTech. In the autumn, we will be the first European bank to launch the IBAN name check service which helps customers check whether the name and account number for payments match. This initiative—based on an idea generated in the Rabobank Moonshot campaign held in 2016—helps tackle incorrect and fraudulent payment transactions. Our peer-to-peer lending platform Rabo & Co now matches entrepreneurs with wealthy customers looking to invest, and our new 'Tellow' app is taking the strain out of bookkeeping for self-employed persons without employees.”

“In the first half of 2017, we once again took major steps towards achieving our ambition to be a meaningful cooperative and a sustainable bank, through the work of the local banks in the Netherlands and our international networks. We are proud that the Food and Agriculture Organization of the United Nations (FAO) awarded the Jacques Diouf Award to Rabobank Foundation for its unfaltering technical and financial support to small cooperative producer cooperatives all over the world. Rabobank Foundation is an independent foundation with Rabobank as its biggest sponsor and founding father. Closer to home, we joined forces with KPMG and CSR Netherlands to stimulate circular economy action plans in the Dutch business sector. In the first half of 2017, our ‘FoodBytes!’ programme once again tracked down the most innovative concepts in food & agriculture and paired them with the capital needed to bring them to market.”

“We stepped up the pace of the transition at Rabobank in the first half of 2017. Our intensified customer focus proved successful, our profitability improved, our capital ratios came out stronger, and we further shaped our ambition to be a meaningful cooperative. And yet, given the changing environment in which we operate, we still need to do more. Our restructuring programme, which is impacting all parts of the bank, is a step up to the next phase of our transition. Under the leadership of the Managing Board, Rabobank will further boost its development and execute the changes needed to make a successful contribution to welfare and prosperity in the Netherlands and to feeding the world sustainably.”

Further information on the results for the first six months of 2017 is provided in the Interim Report 2017.

Rabobank Group Press Office
+31 (0)30 216 2758 or pressoffice@rabobank.nl

Rabobank Investor Relations
+31 (0)30 712 2401 or IR@rabobank.com

Elements of this press release are considered by Rabobank as inside information relating directly or indirectly to Rabobank within the meaning of article 7 of the Market Abuse Regulation (EU Regulation 596/2014) that is made public in accordance with article 17 Market Abuse Regulation.

A combination of changing preferences, product reformulations and government pressure have caused structural changes in the way sugar is perceived and consumed worldwide. “The consumer shift away from sugar has become a global trend,” Rabobank Senior Analyst Nick Fereday said. “This is a big deal for the sugar industry and cannot be dismissed as a passing fad or wished away.”

While the authors of the report, Rabobank Global Strategist Andy Duff and Rabobank Senior Analyst Nick Fereday, do not intend to act as “judge and jury” on sugar and related sweeteners in the report, they identified the primary reasons why consumers are moving away from sugar, including:

• More consumers adopting low-sugar diets instead of ones that focus just on fats because they see sugar and refined carbohydrates as the main culprits in obesity.
• The increase in legislation penalizing sugar-laden beverages, such as a tax on sugary soft drinks in countries such as Chile, Egypt, Mexico, South Africa and Thailand and in major metropolitan areas in the U.S.

Companies in the food industry are responding for instance by including overhauling ingredients, decreasing portion sizes and diversifying their corporate portfolios.

It is estimated that, if initiatives by companies and governments were to achieve a significant (5 percent or above) reduction in global food and beverage sector sugar use over a two- to three-year implementation period, it would offset much of the expected global growth in consumption during this period. In addition, the outlook for industrial sugar use depends heavily on consumption trends in emerging markets.

“The rate of growth of global sugar consumption in the coming 15 years is likely to be lower than the growth rate seen in the last 15 years,” Duff said.

“While China’s pork imports have begun to slow down, other traditional importing countries have reported significant growth,” says Chenjun Pan, RaboResearch Senior Analyst – Animal Protein. “Looking to the second half of 2017, global pork supply is expected to increase further, and competition for global consumers will intensify.” This potential softening bias on prices contrasts with the stability of the Rabobank Five-Nation Hog Price Index thus far in 2017. In the first five months of 2017, China’s pork imports were flat, which contrasts with the significant growth seen in 1H 2016. The recovery of local production and strong international prices is believed to be responsible for slower imports. In China, pork prices have declined by 30%, from the record levels of last year. As a result, Chinese traders are taking a more cautious approach to imports in 2017.

Rabobank holds the view that China’s pork production will increase by about 2% in 2017. Hog production recovery was faster than expected in 1H, as many producers shared a positive view of the market and made rapid herd replenishments. While the expansion of hog production should continue in 2H 2017, it has been slowed by the price plunge in Q2.

“The emergence of these new trade dynamics will be the most important market development in the second half of this year,” according to Justin Sherrard, RaboResearch Global Strategist – Animal Protein.

Tight supply and firm demand have maintained upward pressure on prices and starting to challenge exporters. In this context, the recently announced trade pact with Japan, offering tariff reductions, is good news for European exporters.

US pork exports still face uncertainty due to potential trade policy changes and a strong currency, but have been better than expected thus far in 2017. With weaker demand from China offset by stronger demand from Mexico, total exports are expected to increase by about 10%, compared with 2016. Increasing US exports are becoming even more important as production continues to expand.

Brazil faces great challenges due to political turmoil, and exports in recent months have declined significantly. However, even with these challenges, Brazil’s pork market is still expected to deliver a positive result, due to lower supply, favourable feed prices, and a favourable exchange rate.

Since the start of the Rabo Impact Loan at the end of 2015, many different sustainable leaders have invested in the future of their company. They are active in various sectors and projects, and they also contribute to sustainable development and vital communities. The first two tranches,  totalling 150 million euros from the European Investment Bank (EIB), have been completely used up by 140 SMEs and mid-cap companies. With the third tranche of 200 million euros, it’s expected that another 200 SMEs and mid-cap companies will be able to take a further step towards a sustainable and circular economy.

Bas Rüter, Director of Sustainability at Rabobank: ‘It’s wonderful to experience the great enthusiasm for investment with impact. While sustainability is still seen as optional at the moment, we would like for it to become commonplace for everyone in the coming years. A way of life, so to speak. That’s the focus of our sustainability agenda. A sustainable economy is not only positive for humanity, the environment and society, but also provides ‘profit’ for companies themselves.’

The new Rabo Impact Loan for Healthcare and Education is focused on two sectors that have great social value in the Netherlands. ‘Thanks to the partnership with CEB, we are going to strengthen organisations with a social impact in primary care and primary and secondary education,’ says Bas Rüter. ‘We are launching the Rabo Impact Loan for Healthcare and Education for them. There is a tranche of 100 million available, and we expect to be able to finance more than 100 projects with that. Customers can receive an interest rate discount of up to 0.80%.’

Holger Seifert, Country Manager Benelux CEB, adds: ‘We are convinced that the access to financing for micro, small, and medium sized enterprises and the encouragement of social and sustainable entrepreneurship is important. After all, entrepreneurship is a crucial driver for economic growth and job creation in the Netherlands. In addition, it can be a very efficient vehicle for providing social services that are tailored to local needs. We are entering into cooperation with the Rabobank to realize concrete improvements at social and sustainable level in healthcare and education.’

The first Rabo Impact Loan for Healthcare and Education was provided to Roden Healthcare Centre. Aeijolt Keuning, Director of the BCN Group: ‘The impact loan will help us to realise a sustainably constructed healthcare centre. Demand for healthcare in the Netherlands is changing dramatically, and the country’s healthcare expenses are among the highest in Europe. Nothing less than a complete overhaul is needed to address these challenges, including the integration of primary care services under a single roof in local health centres, which will promote collaboration and improve both the quality of care and patient convenience. An all-new health services centre, which will become operational in Roden in 2018, is currently being developed with these needs in mind.’

‘The power of this loan is that it’s a very concrete stimulus and support for conscious Dutch SMEs,’ explains EIB Vice President Pim van Ballekom. ‘The EIB and Rabobank are on the same wavelength with respect to what we call “climate action”, through which we want to limit climate change and encourage adjustments that reduce its impact. With each investment we look at the additional effects, not only on the economic level, but also in the sense of social, human and environmental impact. The continuation of the impact loan is a clear signal that sustainable enterprise is the future.’

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