Dairy situation and outlook. Wisconsin Agricultural Bankers Association Wisconsin Dells, WI April 5, 2017 Dr. Marin Bozic

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1 Dairy situation and outlook Wisconsin Agricultural Bankers Association Wisconsin Dells, WI April 5, 2017 Dr. Marin Bozic

2 Global Milk output has stayed below year ago since June 2 EU + US + NZ +AU Milk Production YOY Milk Production Changes, 2016 Billion lbs Million lbs % % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % Day Months US EU Oceania EU and Oceania contraction has outstripped US growth 2H in 2016 US continues to grow, Oceania and EU supply is recovering Blimling put it best: How much less of too much is still too much?

3 Milk contraction may be weakening 3 World milk contraction has been easing since Oct Forecasters are calling for annual global growth in 2017

4 Global Milk Production Outlook Annual Change in Milk Production YOY Change, Million lbs Global MP Top5_Ann.Δ United States EU 28 Oceania NZ s milk production used to be the most important fundamental to watch As it s milk production controls expired, EU s importance grew EU support programs are supporting output and prolonging price weakness

5 US Milk Production Growth in US annual milk production grew 1.6% YOY in 2016; Q4 grew by 2.5%YOY Intense growth in New York and Michigan exceeded processing capacity CA continued to shrink during the final stretch of its every 500 years drought

6 US Milk Production Growth in Feb grew 2.3% YOY 6 Drought defeating rain led to mud and mastitis in Feb NE and ME milk growth will strain the supply chain during flush Enormous Growth in TX and NM follows new capacity expansion US milk production growth has a lot of momentum Texas and New Mexico growth is tremendous! 2% YOY annual milk production is expected this year *Figures are leap year adjusted

7 Goodbye California Drought! 7 Texas and New Mexico growth is tremendous! 2% YOY annual milk production is expected this year

8 Oversupply in Northeast & Mideast led to Dumping 8 Aggressive milk production growth has been combined with a reduction of processing capacity and Fluid milk consumption This year milk dumping is expected to exceed 2016

9 Mexican Currency Reacts to US Election Results 9 $0.060 Mexican Peso Exchange Rate $0.055 $0.050 $0.045

10 Trump Effect: NFDM weakens on tough talk on Mexico 10 $1.08 $1.06 $1.04 $1.02 $1.00 $0.98 $0.96 $0.94 $0.92 Intra day CME NFDM Prices Inauguration Day Order to scrap TPP Order to build The Wall Floats idea for 20% tariffs on Mexican imports $ /6/16 12/13/16 12/20/16 12/28/16 1/5/17 1/12/17 1/20/17 1/27/17 2/3/17 The price decline probably isn t all attributed to politics World milk production is rebounding and export demand sees it s a buyer s market Still, the border politics a major talking point in the US NFDM market right now

11 Trump Effect: NFDM weakens on tough talk on Mexico 11 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 US Dairy Commodity Markets Butter Barrel NFDM Whey Futures $0.00 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Extreme butter volatility has paused for over a month Cheese spot prices have buckled under the weight of supply while futures hold Recent cheese price strength isn t reflecting fundamentals trader behavior? Powder futures markets have soured

12 Butter and Nonfat Dry Milk Not Converging Any More 12

13 US NFDM Prices Seldom Top World Prices 13 $1.40 CME, GDT, DDB Prices and Futures $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 EU Quotas end CME, NZX, EEX Futures Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 CME GDT DDB Since EU quotas lifted, US has been globally expensive just once US NFDM futures are more optimistic the NZX and EEX Is this justified?

14 US NFDM Prices Seldom Top World Prices 14 Chinese demand is expected to be up 20% YOY in 2017

15 US has been eager to win export share in NFDM 15 Global NFDM & SMP Prices $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 CME Dutch GDT Nearby Global Dry Whey Prices $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Central Mostly Western Mostly Dutch US prices have generally been the global bargain EU + US milk flush = more powder production that needs to be exported Lower US prices roused strong exports Exports tightened supply and rose prices US is now likely losing export interest

16 Cheese prices are nearing the export trigger 16 Global Cheddar Prices $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 US is looking export competitive CME Blocks GDT Cheddar Nearby $2.50 Global 80% Butter Prices $2.30 $2.10 $1.90 $1.70 US prices are discouraging exports EU prices have been catching up $1.50 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 CME GDT AMF Nearby Dutch

17 NFDM and Whey exports have been elevated Dairy Exports MM lbs Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Non-Fat Dry Milk Whey Butter & Milkfat Cheddar (Harmonized 10) Among US dairy exports NFDM and whey are the most important Butter and cheese exports represent a tiny fraction of domestic demand

18 US Exports are Critical for US dairy demand 18 Each week export demand absorbs a day s volume of US milk production When global milk production rises, exporters like the US must compete for export share, which pressures prices lower Data Source: USDEC

19 O Canada! 19 Over the last 10 years Grassland Dairy Products Inc. has invested in new equipment, new markets Part of that business model has been a long term sale of milk products into the Canadian market. Unfortunately, we have been recently notified that as of April 1, 2017 the new Canadian dairy regulations long term sale is being eliminated. As a consequence of this severe loss, Grassland is now forced to cut back on our milk intake volumes on a very short notice We regret to inform you that effective May 1, 2017, Grassland Dairy Products Inc. will no longer be able to accept your milk supply.

20 How much milk is it? 20 Volumes of milk equivalent dairy exported to Canada as ultra filtered milk (millions of lbs) 2016 Average Monthly Average Daily Number of cows equivalent Total ,030 Grassland ,001 Cayuga Ingredients ,435 O AT KA Milk Products Darigold ,310 AMPI Source: Matt Gould, Dairy & Food Market Analyst

21 Why EU SMP stocks might not matter for some time 21 MIllion lbs Stocks Volume Age of Stocks Current US stocks level EU Gov t SMP Stocks Drawdown Scenario Average Age of Stocks in Months 0 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 The EU gov t is holding 770 MM lbs. of SMP off the market That is enough inventory to satisfy 9 months of US export demand! Levels will likely be static or increase until prices are north of $1.05 By next year the much of the SMP will have exceeded its shelf life Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 0

22 Please eat more cheese! 22 Million lbs US Total Cheese Stocks % YOY 900 US CS T.Cheese_M Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan to Feb stocks growth was 2 nd highest ever Retail demand has subsided as production has risen so far this year

23 Colossal demand absorbed immense supply 23 Million lbs % YOY US Butter Stocks Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Colossal Q4 demand absorbed immense supply Now demand is weak and colossal supply is building at a record pace Futures are shrugging at these numbers how much is too much?

24 Whey supply tightened quickly as exports swelled Total Dry Whey Stocks Million lbs % YOY 20 US DP_Stocks Whey Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Whey stocks have declined considerably with strong export demand Much of the export volume has gone to China

25 WPI production growth is taking capacity from WPC % Whey Protein Utilization 40% 30% 20% 10% Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 Dry Whey WPC 34 WPC 80 WPI

26 NFDM Stocks flattish YOY US NFDM Stocks 250 Million lbs % YOY 50 US DP_Stocks NFDM Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US powder prices have been export competitive, just under EU prices High exports have kept stocks from billowing despite stronger production

27 Milk Production Growth Outlook Annual Change in Milk Production YOY Change, Million lbs Global MP Top5_Ann.Δ United States EU 28 Oceania US milk production is expected to grow +2% in 2017 EU 2H growth offsets 1H contraction Oceania will grow YOY, not quite recovering the contraction in 2016

28 $1.00 $1.20 $1.40 $1.60 $1.80 $2.00 $2.20 $2.40 $2.60 CME Barrel Short Term Market Outlook: 28 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 NDPSR NFDM $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 NDPSR Dry Whey $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 CME Butter

29 Short Term Market Outlook 29 CME Barrel NDPSR Whey CME Butter NDPSR NFDM Class III Class IV Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CME Barrel NDPSR Whey Class III CME Butter NDPSR NFDM Class IV

30 Percent of Milk Enrolled in the Dairy Margin Protection Program at Catastrophic and Buy Up Levels: 2015 to % 12% 2% 75% 39% 50% 25% 61% 88% 98% 0% $4.00 Catastrophic Coverage Buy Up Coverage

31 Dairy-RP Expected Revenue Avg. CME Futures at Hedging Class III $16.26 Class IV $15.94 Farmer s Choice 75% 25% Blend Price $16.18 Estimate of State Milk per Cow Expected Milk Production During Quarter (per cow) 5,806 Lbs Blend Price $16.18 Revenue Guarantee: $939 cow

32 Dairy-RP 2009 to 2016 Prevents catastrophic losses and reduces volatility Milk Price $24 $22 $20 $18 $16 $14 $12 $10 $8 Indemnity Without Dairy-RP: $16.27/cwt With Dairy-RP: $16.67/cwt Premiums

33 Dairy Growth Coming Back to Upper Midwest vs Source: The McCully Group

34 Milk Price Basis in Wisconsin 34 $3.50 Milk Price Basis (All Milk Class III Milk) $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

35 Milk Price Premiums in Wisconsin 35 $2.50 Gross Milk Price Premiums (All Milk Class III Milk) (Value of Excess Components + PPD + SCC Adjustments) $2.00 $1.50 $1.00 $0.50 $0.00

36 Milk Price Premiums in Michigan 36 $1.50 Gross Milk Price Premiums (All Milk Class III Milk) (Value of Excess Components + PPD + SCC Adjustments) $1.00 $0.50 $0.00 $0.50 $1.00 $1.50

37 Cow Productivity Gains Outpace U.S. Population Growth Rate % 2.0% 1.5% 1.0% 0.5% 0.0% 5 Yr CAGR Yield Per Cow US Population Growth

38 Milk Supply Growth Due To Productivity Gains 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Calculated as 3 year moving average of Mil. Lbs

39 Dairy Herd Size Stabilized when Exports Took Off 39 Thousands 11,500 11,000 10,500 10,000 9,500 9,000 8, % 16% 14% 12% 10% 8% 6% 4% 2% 0% Exports as % of U.S. Milk Solids Average number of milk cows in the U.S. U.S. Dairy Exports as % of U.S. Milk Solids

40 Per capita production of frozen dairy products peaked in 1994 and has trended downward since. 40 Lbs/person/year Regular Hard Ice Cream Reduced Fat Ice Cream Sherbet Other Frozen

41 Per capita consumption of fluid milk products has been on a downward trend for decades 41 Lbs/person/year Whole White Reduced Fat Lowfat Skim Flavored

42 Yogurt is the only cultured product with per capita consumption growth in recent years 42 Lbs/person/year Yogurt Sour Cream Cottage Cheese

43 Per capita consumption of cheese continues to grow lbs/person/year American Mozzarella Other Natural Process Cheese Solids

44 Per Capita Consumption of Other than American Cheese is Rising Faster than American 44 (pounds consumed per person per year) American Cheese Other than American

45 New Demand For Cheese Capacity By Mil lbs additional annual production needed 2,000 1,800 1,600 1,400 1,200 1,

46 Domestic SNF Demand in Conservative (10 Yr Trend) Optimistic (Above Trend) Realistic (Long Term Trend) Population Growth 0.8% 0.8% 0.8% Per Capita Growth 0.1% 0.3% 0.0% Total CAGR 0.7% 1.1% 0.8% SNF U.S. Demand in ,583 15,583 15,583 SNF U.S. Demand in ,774 17,458 16,943 Additional Milk Needed 13,387 21,071 15,282

47 Domestic Butterfat Demand in Conservative (Below 20 Yr Trend) Optimistic (At 3 Yr Trend) Realistic (10 Yr Trend) Population Growth 0.8% 0.8% 0.8% Per Capita Growth 0.5% 0.9% 0.6% Total CAGR 1.3% 1.7% 1.4% Butterfat U.S. Demand in 2015 Butterfat U.S. Demand in ,583 7,583 7,583 8,667 9,018 8,753 Additional Milk Needed 28,514 37,756 30,794