Market Outlook GLOBAL DAIRY. *Mid-point of range. Milk powder, cheese and butterfat are Oceania; whey is Western Europe.

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1 U.S. exports (MT, Jan-Nov): NDM/SMP 510,516 24% CHEESE 285,466 19% WHEY 455,899 5% BUTTERFAT 80,550 88% Details: PAGE 3 January 31, 2014 Volume 18 No.1 GLOBAL DAIRY Market Outlook U.S. Dairy Export Council PRICE TREND - SMP, WMP, CHEESE, BUTTER, WHEY* ($/MT) *Mid-point of range. Milk powder, cheese and butterfat are Oceania; whey is Western Europe. China s appetite keeps markets firm By Alan Levitt, Marc Beck and Brad Gehrke The global dairy markets remain firm heading into February. Milk production from the major suppliers is on the rise, but it s easily absorbed by the market. China is buying at unprecedented levels, supporting the entire dairy complex. Mild weather and recordhigh milk prices have spurred a milk production recovery across Europe. EU-28 milk deliveries in October and November were up 4.2% vs. a year earlier, and now look poised to finish calendar 2013 about 0.7% ahead of 2012 (adjusted for leap day). In the September-November period, 18 of the 28 countries registered increases, led by Germany (+3.9% vs. prior year), the UK (+8.5%), France (+4.0%), the Netherlands (+7.7%) and Ireland (+12.7%). New Zealand pastures are in good condition and production is ahead of a year ago. In the September-November period output was up 6.0% from prior year. Production for the full 2013/14 is projected to be up 6-7%. However, drought in Australia has dashed hopes of growth this year. Output in the first five months of the season was down 3.9%. U.S. milk production hasn t yet responded to favorable milk margins; in the last four months of 2013, production was up just 0.5% from the year before. Combined milk production/deliveries from the five major suppliers (EU-28, U.S., New Zealand, Australia and Argentina) was up 2.7% in the August-November period an increase of 618,000 tons of milk per month. China buying remains the key driver of the global dairy markets. In the last four months of 2013, China imported a staggering 550,404 tons of milk powder, whey, cheese and butterfat more than the purchases of Russia, Mexico, Japan and Algeria put together. This figure is up 74% from the year before. For the full year, imports were up 34% from 2012 and up 61% from Meanwhile, China s appetite (and willingness to pay historically high prices) has squeezed out other buyers in recent months. In the August-October period, Algeria imports were down 32% from the year before and Mexico s were off 14%. In August-November, Japan s imports were down 8%. In situations where buyers Turn to China's appetite, p. 2 CURRENT PRICES SMP WMP Cheddar cheese Butter Butteroil Dry whey WPC-34% Lactose EUROPE (NC) (-25) (-188) (-225) *with change from late-december Source: USDA's Dairy Market News. NA NA $/MT, FOB SHIP* OCEANIA (NC) (+100) (+288) (+100) (NC) (+100) Source: USDEC. Copyright 2014 U.S. Dairy Export Council. All rights reserved by copyright owners. Reproductions of all portions of this newsletter is permitted with proper credit to U.S. Dairy Export Council Wilson Blvd., Suite 400 Arlington, VA U.S.A. PHONE FAX usdec.org Managed by Dairy Management Inc.

2 OVERVIEW 2 China's appetite (cont.) aren t willing or able to meet what China is willing to pay, we see more interest in fatfilled milk powders and other economic milk solids replacers for various applications. International prices are mostly steady, with some adjustments in butterfat (European prices coming down and Oceania prices coming up to narrow the gap). Trading activity has picked up since the holiday lull. Enduser stocks are low. Buyers are looking to secure second-quarter needs, having held off in hopes of lower prices that haven t materialized. There is little uncommitted supply available. The market also is supported by an upcoming milk powder tender from Algeria, where EU suppliers hope to secure a good portion of the business. In addition, domestic production in China and India is impacted by foot-and-mouth disease, adding to the overall firm market tone. The dry whey market has firmed in recent months and prices are now at their highest in nearly a year. WPC 34/35 is now selling for record highs, around $4000/ton, nearly 50% since last March. Prices have been pulled up by the strength in SMP. Supplies in Europe and the United States are tight, with production sold out several months ahead. The lactose market, on the other hand, remains soft, with prices at a two-and-a-half-year low. Global Dairy Trade auction prices reached TOTAL MILK PRODUCTION FROM MAJOR EXPORTERS record highs at the Jan. 21 event. The average winning price was $5,025, up 46% from a year ago. Moreover, the forward curve remains flat to higher, suggesting strong prices through mid-year. WMP traded for nearly $5000/ton out to June, and winning prices for SMP and AMF are around $4700/ton and $5700/ton, respectively, to July. Questions remain about how quickly China s milk production can recover after a challenging Weather issues, foot-andmouth disease and industry restructuring led to a contraction estimated very loosely at 6% below 2012 output. Even if weather improves (000 MT) Includes EU-28, U.S., New Zealand, Australia and Argentina. EU-28 and Argentina are milk deliveries. 30-day months. *December 2013 USDEC estimate. Source: USDA, EuroStat, DairyAustralia, DCANZ, Argentina Ministry of Agriculture. in 2014, some of the structural issues will take longer to settle. For now, the expectation is a further double-digit increase in imports in 2014, on top of the massive purchases made in As a result, we expect the markets to remain firm well into second quarter, at least. New Zealand is now on the downhill side of the season, and production is focused on WMP at the expense of cheese, SMP and butter. As China s appetite is sated, other buyers will still need to stay in the market to rebuild their holdings. However, they may not be willing to buy at the lofty price levels of the Chinese. ABOUT THIS ISSUE Global Dairy Market Outlook is written and distributed monthly by the U.S. Dairy Export Council (USDEC), 2101 Wilson Blvd., Suite 400, Arlington, VA 22201, USA, (703) , FAX (703) , website Data is compiled and analyzed by Alan Levitt, vice president of communications and market analysis; Marc Beck, executive vice president of strategy and insights; and Brad Gehrke, director of global trade analysis. Analysis is supported by USDEC's network of nine international offices. This issue of Global Dairy Market Outlook covers conditions at late-january USDEC uses sources believed to be reliable but cannot warrant the accuracy of the information herein. Global Dairy Market Outlook is solely for information purposes and is not to be construed as commercial trading advice. The U.S. Dairy Export Council, primarily funded by Dairy Management Inc. through the producer checkoff, works closely with its member processors, trading companies and others to build global demand for U.S. dairy products. U.S. Dairy Export Council Global Dairy Market Outlook Visit us at usdec.org JANUARY 31, 2014 VOLUME 18 NO. 1

3 U.S. exported 15.5% of its milk production (TSB) in November YTD volumes +17% vs. prior year: PAGE 7 3 U.S. Exports NDM/SMP... 4 Cheese... 4 Butterfat... 4 Whey... 5 Lactose... 6 WMP... 6 Food Preps (Blends)... 6 Fluid Milk/Cream... 6 U.S. DAIRY EXPORTS, TOP 10 MARKETS (JANUARY-NOVEMBER (JANUARY-APRIL AND % CHANGE VS. PRIOR YEAR) Change (%) 0% 0-15% 15% + CANADA $528m 22% MEXICO $1,287m 14% CARIBBEAN $198m 4% SOUTH AMERICA $254m 8% MIDDLE EAST/ NORTH AFRICA $721m 78% SOUTHEAST ASIA $1,179m 40% CHINA $635m 67% JAPAN $273m 2% SOUTH KOREA $274m 31% OCEANIA $232m 16% China, SE Asia and ME/NA drive 2013 gains U.S. dairy exporters maintained global share of nonfat dry milk/ skim milk powder (NDM/SMP) and cheese in November, as New Zealand focused its flush milk supply on producing and exporting whole milk powder. November cheese shipments reached a record high and NDM/ SMP sales topped 45,000 tons for the eighth straight month. In total, U.S. suppliers shipped 154,168 tons of milk powder, cheese, butterfat, whey and lactose during November, up 29% from the prior year. In November, export value was $579 million, up 49% from the year before. As has been the case throughout 2013, the three fastest-growing markets (by value) for U.S. suppliers in November were China (+87% vs. prior year, with gains in SMP, WPC and WMP); Southeast Asia (+ 87%, with increases in SMP); and Middle East/North Africa (+159%, with greater sales of butterfat, cheese and milk powder). Exports have been on a steady pace since June, averaging $599 million per month over the last six months. This figure is 47% higher than the prior year. With one month left in 2013, the value of U.S. dairy exports already topped the full-year total for 2012 and established a new high. January- November exports were valued at $6.11 billion, compared with $5.12 billion in all of At the current pace, U.S. exports will top $6.6 billion in 2013, up about 30% from the 2012 total. On a total-solids basis, exports were equivalent to 15.5% of U.S. milk production in November. Meanwhile, imports as a percent of milk-solids production in November were 3.2%. U.S. EXPORTS AS % OF PRODUCTION PRODUCT JAN.-NOV 2013 YR AGO NDM/SMP u 58% 47% Total cheese u 6.2% 5.3% Butterfat u 10.4% 5.6% Dry sweet whey u 57% 49% Lactose u 73% 66% Total milk solids u 15.6% 13.4% U.S. EXPORTS AND IMPORTS AS % OF PRODUCTION Source: USDA, USDEC, National Milk Producers Federation.

4 NDM/SMP, Cheese & Butterfat 4 NDM/SMP U.S. NDM/SMP EXPORTS - ROLLING QUARTERS U.S. NDM/SMP CUSTOMERS NDM/SMP exports were lower in November vs. the prior month, but still 54% ahead of the year before. November volume (45,527 tons) marked the eighth straight month of exports of at least 45,000 tons. During that time, U.S. suppliers exported 66% of their NDM/SMP production. CHEESE U.S. CHEESE EXPORTS - ROLLING QUARTERS U.S. CHEESE CUSTOMERS Cheese exports reached a record high 28,424 tons in November, up 54% from a year earlier. Shipments have topped 25,000 tons for nine straight months. In the first 11 months of the year, shipments to Mexico were up 24% vs. prior year, while South Korea (+18%), Japan (+11%) and Egypt (+120%) also posted double-digit gains. BUTTERFAT U.S. BUTTERFAT EXPORTS - ROLLING QUARTERS U.S. BUTTERFAT CUSTOMERS Butterfat exports in the June-November period were more than triple the volume of a year ago, bringing the year-to-date figure to 80,550 tons. Nearly two-thirds of the 2013 volume has gone to the Middle East/North Africa region, led by Saudi Arabia and Iran. Source: USDA.

5 Whey Products 5 WPC exports have lagged year-ago levels for the last six months. From June-November, WPC shipments were down 9%, with declines in sales to Mexico (-24%), Vietnam (-59%) and South Korea (-54%). China remains the major customer for U.S. whey products, with YTD purchases up 19% vs U.S. TOTAL WHEY EXPORTS - ROLLING QUARTERS U.S. TOTAL WHEY CUSTOMERS U.S. DRY WHEY EXPORTS - ROLLING QUARTERS U.S. DRY WHEY CUSTOMERS U.S. WPC EXPORTS - ROLLING QUARTERS U.S. WPC CUSTOMERS U.S. WPI EXPORTS - ROLLING QUARTERS U.S. WPI CUSTOMERS Source: USDA.

6 Other Products 6 Lactose exports have declined for four straight months; the November volume of 23,338 tons was the lowest since June Still, year-to-date export volumes are up 12%. In the first 11 months of 2013, WMP exports to Algeria topped 11,800 tons and shipments to China/Hong Kong were up three-fold from the prior year. Fluid milk exports were up 42% in the January-November period. U.S. LACTOSE EXPORTS - ROLLING QUARTERS U.S. LACTOSE CUSTOMERS U.S. WMP EXPORTS - ROLLING QUARTERS U.S. WMP CUSTOMERS U.S. FOOD PREPS (BLENDS) EXPORTS - ROLLING QUARTERS U.S. FOOD PREPS (BLENDS) CUSTOMERS U.S. FLUID MILK/CREAM EXPORTS - ROLLING QUARTERS (000 LITERS) U.S. FLUID MILK/CREAM CUSTOMERS (000 LITERS) Source: USDA.

7 5 Year Trend 7 U.S. EXPORTS *Volume includes SMP, WMP, food preps, whey, cheese, butterfat, lactose VOLUME AND VALUE January-November exports top $6.1 billion U.S. exports in the first 11 months of 2013 were valued at $6.11 billion, 30% more than the prior year. Aggregate export volume of dry ingredients (milk powder, whey products and lactose), cheese and butterfat was 1,757,626 tons, 17% more than the year before, with gains across all product categories. NDM/SMP, cheese and lactose already reached record highs with one month in the year to go. NDM/SMP CHEESE BUTTERFAT TOTAL WHEY DRY WHEY WPC WPI LACTOSE WMP FOOD PREPS (BLENDS) FLUID MILK/CREAM (000 LITERS) TOTAL EXPORT VALUE (MILLION $) Above charts: TOTAL YTD Source: USDA, USDEC.