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

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1 U.S. exports (MT, Jan-Dec): NDM/SMP 444,727 2% CHEESE 260,033 16% WHEY 468,144 4% BUTTERFAT 46,019-27% Details: PAGE 3 February 28, 2013 Volume 17 No.2 GLOBAL DAIRY Market Outlook U.S. Dairy Export Council Price Trend - SMP, WMP, Cheese, Butter, Whey* ($/MT) SMP WMP cheese BUTTEr WHEY SMP, WMP, Cheese, Butter 5,000 4,540 4,080 3,620 3, ,600 1,480 1,360 1,240 1,120 Whey *Mid-point of range. Milk powder, cheese and butterfat are Oceania; whey is EU. Dry New Zealand firming markets By Alan Levitt, Marc Beck and Brad Gehrke In the first two months of 2013, the global dairy markets have been something of a mixed bag: softer in Europe and the United States, stronger in Oceania. As a result, pricing relationships that clearly favored Oceania in Q4 have moved into closer alignment. We maintain our view that tighter global supply will support higher world prices as the year unfolds. Reflecting tighter Oceania supply, Global Dairy Trade (GDT) prices have increased five auctions in a row, putting the trade-weighted index up 36% since late July. Meanwhile, New Zealand has been aggressive in moving record flush production, limiting its inventory build-up. December shipments of milk powder, cheese, butterfat and whey were nearly 300,000 tons, up 17% from the prior year and more than the EU, United States and Australia combined. For all of 2012, New Zealand exports were up 13% to move back above the EU-27 after two years of running in second place. But the second half of Oceania s season is going to be very different from the first. Extremely dry weather in New Zealand s North Island, where 60% of the nation s milk is produced, is causing a quick end to the production season. And Australian farmers are dealing with low margins, plus weather that s too hot and dry in some places and too wet in others. New Zealand milk production, which was tracking 7% higher June-December, is expected to run about 7% lower in January-May. Australia output was down 5.5% in January and forecast to be flat in the 2012/13 season. Most current production is booked and little excess inventory is available from the region. With reduced milk supplies, we expect less SMP, butterfat and cheese to be produced in the back end of the season. In contrast, the market tone is weaker in the northern hemisphere, as declining exports in Q4 pushed more product back onto domestic markets. In the last quarter, EU exports of milk powder, cheese, butterfat and whey were down 8% from the prior year, while U.S. exports were down 7%. The drop-off in SMP shipments was particularly dramatic: EU and U.S. exports in Q4 were off 41% and 10%, respectively. Traders cite lack of price competitiveness for lost export share. Turn to Dry NZ, p. 2 Current Prices SMP WMP Cheddar cheese Butter Butteroil Dry whey WPC-34% Lactose Source: USDA's Dairy Market News. Europe (-63) (NC) (-50) (-50) (-25) (-118) NA NA $/MT, FOB ship Oceania (+238) (+150) (+50) (+125) (+100) (+13) (NC) (-150) Source: USDEC. Copyright 2013 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 Dry NZ (cont.) The sales slowdown overshadowed the fact that EU milk production was down 1.6% in Q4. Weather has been relatively mild this winter and output is now rising seasonally, but milk collections are still below a year ago. Product inventories are sufficient given the reduced interest from overseas, though as noted in previous issues, Europe has no intervention stocks of SMP for the first time in four years. Private Storage Aid (PSA) for butter starts March 1. Taking butter off the market and putting it into storage could provide market support. Supply out of the United States probably won t be as dire as earlier thought. Milk production in November-January was up 1.1% vs. the prior year. Farmgate margins have been falling since November but they aren t quite in the territory that signals overall herd contraction. Therefore milk production and product supplies will be greater than previously forecast, though year-over-year gains may pale due to unfavorable 2012 comparisons. U.S. inventories of NDM increased 54,000 tons (+42%) in December to 1 tons, a four-year high, and cheese and butter stocks also are higher. Argentina has become less of a factor on the world market. Milk production was down 8% in the fourth quarter and exports were off 20%. TOTAL MILK PRODUCTION FROM MAJOR EXPORTERS 23,500 22,760 22,020 21,280 20,540 Includes EU, U.S., New Zealand, Australia and Argentina. EU and Argentina are milk deliveries. 30-day months. February 2012 adjusted for leap day. Source: USDA, EuroStat, DairyAustralia, DCANZ, Argentina Ministry of Agriculture. On the demand side, buyers are mostly covered into Q2, but there is growing concern about supply availability in late Q2-early Q3. Many are still working through pipeline holdings. China continues to buy very heavily; imports of milk powder, whey, cheese and butterfat were a record 144,000 tons in January, up 54% from a year ago. With Chinese New Year complete, traders are trying to determine how strongly China comes back and whether they ran down holdings from earlier purchases. Another Algerian tender for an estimated tons of milk powder is due next week, (000 MT) J F M A M J J A S O N D with shipment in May-July. The protein complex has weakened sharply in the last six weeks. Dry whey prices are off 10-15% as buyers are willing to let the price settle before purchasing too far ahead. Pushback from feed users is leading the market down. Dry whey remains expensive relative to WPC (per pound of protein) but WPC- 34 is softening as well. However, the market for whey proteins for higher-value applications remains steady. Lactose prices are steady, though demand is lighter due to less milkpowder standardization. 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-february, 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 FEBRUARY 28, 2013 VOLUME 17 NO. 2

3 U.S. exported 11.6% of its milk production (TSB) in December YTD volumes +3% 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-DECEMBER (January-April AND and % CHANGE change VS. vs. PRIOR prior YEAR) year) Change (%) 0% 0-15% CANADA $554m 11% MEXICO $1,232m 6% CARIBBEAN $210m 13% SOUTH AMERICA $256m 62% MIDDLE EAST/ NORTH AFRICA $431m 15% SOUTHEAST ASIA $921m 4% CHINA $415m 15% JAPAN $284m 3% SOUTH KOREA $227m 2% OCEANIA $215m 35% 15% + U.S. export volumes lower in H2 U.S. dairy exports reached record levels in 2012, but gains were muted by a slowdown in the second half of the year. Overseas sales were up 3% by aggregate volume and 8% by value vs. the prior year. However, volume and value were 9-10% lower in the second half of the year than the first. U.S. volume declines and lost share coincided with U.S. benchmark commodity prices moving above comparable Oceania prices last summer when drought fears moved U.S. prices up. The split played out most dramatically in milk powder. NDM/ SMP exports in the first half of the year were up 11% vs Exports in the second half were down 6%. December shipments were 32,454 tons, equivalent to 37% of U.S. NDM/SMP production during the month, the lowest figure since April 2010, and below the rate of exports needed to prevent inventories from accumulating. Cheese exports in 2012 were a record high 260,033 tons, up 16% from WPC shipments also reached a new high of 233,362 tons, up 27%. Total dairy export value in December was $419.9 million, down 2% from a year earlier. Full-year value was a record-high $5,208 million. In December exports were equivalent to 11.6% of U.S. milk solids production, the lowest figure since March In the previous 31 months, exports represented 13.5 percent of U.S. milk solids production. Meanwhile, imports as a percent of milk solids production were 4.0 percent in December. U.S. exports as % of production PRODUCT Jan-DEC 2012 YR AGO NDM/SMP u 45% 49% Total cheese u 5.3% 4.7% Butterfat u 5.5% 7.6% Dry sweet whey u 47% 55% Lactose u 66% 69% Total milk solids u 13.2% 13.3% U.S. EXPORTS AND IMPORTS AS % OF PRODUCTION % of mik production (TSB) EXPOrTS IMPOrTS 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 U.S. exports in the fourth quarter were 95,041 tons, down 1.2% vs. last month and down 9.8% vs. the prior year. In 2012, sales to Mexico were up 13% from the prior year while exports to Southeast Asia were off 28%. Shipments to the Middle East/ North Africa nearly doubled. 140, ,000 98,000 77,000 56, , , ,000 84,000 42,000 Cheese U.S. Cheese Exports - Rolling Quarters U.S. cheese customers U.S. exports in the fourth quarter were 58,482 tons, up 4.5% vs. last month and up 2.0% vs. the prior year. In 2012 shipments to Mexico were up 36% vs. prior year, while Japan (+13%), South Korea (+12%) and Canada (+25%) also posted solid gains. 85,000 71,000 57,000 43,000 29,000 70,000 56,000 42,000 28,000 14,000 Butterfat U.S. Butterfat Exports - Rolling Quarters U.S. butterfat customers U.S. exports in the October- December period were 9,874 tons, up 19.5% vs. last month but down 1.0% vs. the prior year. In 2012 almost three-quarters of the volume went to the Middle East/North Africa region (primarily Saudi Arabia), while sales to Mexico and Canada dropped off. 28,000 22,400 16,800 11,200 5,600 18,000 14,400 10,800 7,200 3,600 Source: USDA.

5 Whey Products 5 U.S. exports of whey products in the most recent three months were 109,720 tons, down 4.3% vs. last month and down 7.5% vs. the previous year. China remains the major customer for U.S. whey products, with 2012 purchases up 1.7% vs. the year before. WPC exports were up 27.3% in 2012, despite slowing in the last four months. U.S. Total Whey Exports - Rolling Quarters U.S. total whey customers 135, , ,000 90,000 75, , , ,000 68,000 34,000 China SE Asia Mexico Canada Japan U.S. Dry Whey Exports - Rolling Quarters U.S. dry whey customers 72,000 56,000 SE Asia China Mexico Canada Japan U.S. WPC Exports - Rolling Quarters U.S. WPC customers 75,000 53,000 42,000 31, ,000 96,000 72,000 24,000 China SE Asia Mexico Canada So. Korea U.S. WPI Exports - Rolling Quarters U.S. WPI customers 5,300 4,800 4,300 3,800 3,300 5,800 4,640 3,480 2,320 1,160 Canada China SE Asia Netherlands Mexico Source: USDA.

6 Other Products 6 Lactose exports were slightly lower at year-end. In the fourth quarter lactose export volume was 75,188 tons, down 1.9% from the prior month and down 5.4% from the prior year. Shipments of food preps increased in 2012 (+5.2%). Meanwhile, exports of fluid milk/cream were down 28% in U.S. Lactose Exports - Rolling Quarters U.S. lactose customers 85,000 76,000 67,000 58,000 49,000 72,000 57,600 43,200 28,800 14,400 U.S. WMP Exports - Rolling Quarters U.S. WMP customers 24,000 18,000 7,500 6,000 12,000 4,500 6,000 3,000 1,500 U.S. Food Preps (Blends) Exports - Rolling Quarters U.S. food preps (blends) customers 24,500 21,500 18,500 15,500 40,000 24,000 8,000 U.S. Fluid Milk/Cream Exports - Rolling Quarters (000 LITERS) U.S. fluid milk/cream customers (000 LITERS) 22,000 19,200 16,400 13,600 10,800 25,600 19,200 12,800 6,400 Source: USDA.

7 5 Year Trend 7 U.S. exports volume and value Volume 165, , ,000 96,000 AGGREGATE VOLUME, SELECTED PRODUCTS* TOTAL DOLLAR VALUE , *Volume includes SMP, WMP, food preps, whey, cheese, butterfat, lactose Value (million $) U.S. exports fall from mid-year peaks U.S. dairy exports in December were down 23% by volume and 16% by value since the peak levels achieved in May. Still, cheese, WPC, NDM/SMP and WPI posted record levels in Dry whey exports declined for the second straight year, falling 13% from 2011 levels. This reflects many buyers trading up from dry whey to WPC. NDM/SMP Cheese Butterfat 4 384, , ,000 96, , , ,000 54,000 40,000 20,000 Total Whey Dry Whey WPC 500, , , , , , , , , ,000 50,000 WPI Lactose WMP 20,000 12,000 8,000 4, , , ,000 45,000 30,000 15,000 Food Preps (Blends) Fluid Milk/Cream (000 liters) Total Export Value (Million $) 40,000 20,000 5,400 4,320 3,240 2,160 1,080 Above charts: TOTAL YTD Source: USDA, USDEC.