Market Outlook GLOBAL DAIRY. Whey prices supported U.S. NDM/SMP exports (p. 4) Milk production flat (p. 8)

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1 U.S. exports (MT, Jan-Aug): NDM/SMP 316,059 9% CHEESE 183,189 21% WHEY 319,733 8% BUTTERFAT 34,531-31% DETAILS, PAGE 3 October 16, 2012 Volume 16 No.5 GLOBAL DAIRY Market Outlook U.S. Dairy Export Council Whey prices supported U.S. NDM/SMP exports (p. 4) Milk production flat (p. 8) EU US (rolling quarters) 1, ,000 23,500 ($/MT) 1,400 1,200 1, ,000 98,000 77,000 (000 MT) 22,760 22,020 21, ,000 20,540 World whey prices are steady after rising more than 15% in August-September 2009 U.S. powder exports are running 9% ahead of last year's pace J F M A M J J A S O N D Milk production from the five major suppliers was up just 0.6% in June-July Buyers pause, but they ll be back By Alan Levitt, Marc Beck and Brad Gehrke Our medium-term outlook characterized by tighter supplies remains unchanged, though conditions have moderated since our last report. For now, the world dairy markets are relatively balanced. Buyers are mostly covered through the end of the year, so activity is slow. The Oceania production season is off to a good start. That s created a slightly weaker market sentiment. Coverage for 2013 is getting underway, but buyers are still cautious.. They also know that the robust milk production growth of the last two years won t be repeated. In the year ending June 2012, milk production from the five major suppliers (EU, U.S., New Zealand, Australia and Argentina) increased by 7.5 million tons. The prior year it expanded by 7.2 million tons. But higher feed costs have changed the economics of dairy farming. In the current year ending June 2013, we project growth from those five of just 2-3 million tons even with healthy production gains out of New Zealand, U.S. sustaining consistent export pace By Alan Levitt, Marc Beck and Brad Gehrke Australia and Argentina. Perhaps the biggest wild card is whether an improved milk price outlook in the United States can drive a quicker production recovery. Volumes available for export will be reduced, and even if imports slow under the weight of a weaker global economy we still think supplies will be in a precarious balance in It s unclear what affect the economic situation will have on consumption and purchasing patterns. The IMF cut its global growth forecasts for Turn to Buyers pause, p. 2 U.S. dairy exports have been between 12% and 15% of milk production for 29 straight months, an unprecedented mark of consistency. August performance was highlighted by strong sales of NDM/SMP and whey protein concentrate. This offset declining volumes of cheese, dry whey and butterfat. Turn to Consistent, p. 2 THIS ISSUE AT-A-GLANCE U.S. exports mixed in August...3 World milk production is flat...8 Global trade is steady...10 Prices are steady...11 U.S. dollar in a range...13 U.S. Exports...3 Exports: 5 Year Trend...7 Global Milk Production...8 Key Suppliers...9 World Dairy Trade...10 World Prices...11 Currency Exchange...13 ACCESS TRADE DATA ONLINE Visit usdec.org and click Why U.S. Dairy, then Export Trade Data Copyright 2012 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 World markets (cont.) Continued from page and Higher commodity prices that returned this summer have not been uniformly passed along to consumers, but that s probably still coming. Regardless, we think demand is resilient enough to keep import volumes at a high level. China is key, of course, but Southeast Asia and the Middle East/North Africa region are becoming more prominent. Competitive factors are tilting toward the low-cost producers in the Southern Hemisphere. On cheese and butterfat, Oceania prices are still 15-25% below EU and U.S. prices. Higher prices in the north haven t managed to pull up prices in the south. In addition, the firming Euro (+7% vs. the U.S. dollar since late July) has made EU products relatively more expensive on the world market. We re keeping close tabs on global SMP stocks, which are dwindling to their lowest levels in memory. Cheese and butter stocks are in better shape, but not excessive. Meanwhile, global demand for whey proteins, particularly higher concentrates and isolates, is likely to continue to outstrip supply until new capacity starts to come on line next year. Dry whey prices haven t been below $1100/ton for more than a year, and don t seem likely to revert below that mark anytime soon. Consistent (cont.) AGGREGATE EXPORT VOLUME SMP, WMP, CHEESE, BUTTERFAT, WHEY Continued from page 1 EU NZ US AUSTRALIA ARGENTINA Year-to-date, total dairy export value was $3.57 billion, up 14% from 2011 levels. In 2012, the United States has increased its share of world cheese trade and maintained its share of NDM/SMP. However, it has lost share on butterfat and whey products. 270, , , ,000 Among the top five exporters, the United States has maintained share of export volume this year at about 19%. New Zealand has about 35% and the EU has 34%. Australia has 7% and Argentina has 5%. Overall trade volume is up 11% from a year ago. 54,000 Source: GTIS & USDA. 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 mid-october, 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. USDEC, 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 OCTOBER 16, 2012 VOLUME 16 NO. 5

3 U.S. exported 14.2% of its milk production (TSB) in August YTD volumes +7% 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-AUGUST (JANUARY-APRIL AND % CHANGE VS. PRIOR YEAR) Exports (in millions) $800 + CANADA $368m 16% MEXICO $814m 10% CARIBBEAN $133m 14% SOUTH AMERICA $166m 54% MIDDLE EAST/ NORTH AFRICA $330m 28% SOUTHEAST ASIA $648m 2% CHINA $277m 35% JAPAN $205m 13% SOUTH KOREA $155m 4% OCEANIA $144m 55% $700 $600 $500 $400 $300 $200 Strong NDM/SMP exports pace August numbers Overall U.S. dairy export volumes ticked slightly higher in August (vs. July) up by about 4% by volume and 8% by value. A big jump in SMP shipments (42,516 mt, +34% vs. July) and another record month for WPC (24,592 mt) offset continued slippage in cheese, dry whey and butterfat. Lactose slowed as well, with its lightest pace in a year-and-a-half. Total dairy export value in August was $433.9 million, up 2% from a year ago. Year-to-date value is $3,574.2 million, up 14% from last year. For NDM/SMP, it marked just the second time export volumes topped 40,000 tons since fall of Nearly half the volume went to Mexico, while Algeria and the Philippines each took 4,000 tons. Cheese, dry whey and butterfat volumes trended lower for the third straight month, after peaking in May. Cheese volume was the lowest since January, butterfat was the lowest since last September and dry whey was the lowest since September 2009 (dailyaverage basis). Meanwhile, WPC exports remain robust; export volumes have doubled in the last three years, driven by tremendous growth from China and Southeast Asia. In August, exports were equivalent to 14.2% of U.S. milk solids production, bringing the year-to-date percentage to 13.6%. Exports were equivalent to 13.3% of U.S. milk solids production in 2011 and 12.8% in Meanwhile, imports as a percent of milk solids production were just 3.2% in August U.S. EXPORTS AS % OF PRODUCTION PRODUCT JAN-AUG 2012 YR AGO NDM/SMP u 46% 48% Total cheese u 5.6% 4.8% Butterfat u 6.0% 9.2% Dry sweet whey u 47% 52% Lactose u 66% 69% Total milk solids u 13.6% 13.3% U.S. EXPORTS AND IMPORTS AS % OF PRODUCTION % of mik production (TSB) EXPORTS IMPORTS Source: USDA, USDEC, National Milk Producers Federation.

4 U.S. EXPORTS NDM/SMP, Cheese & Butterfat 4 NDM/SMP U.S. NDM/SMP EXPORTS - ROLLING QUARTERS U.S. NDM/SMP CUSTOMERS U.S. exports in the most recent three months were 113,495 tons, down 2.5% vs. last month but still up 2.6% vs. last year. Year-to-date, sales to Mexico were up 20% from the prior year while exports to Southeast Asia were off 29%. Shipments to the Middle East/North Africa more than doubled. 140, ,000 98,000 77,000 56, , ,000 84,000 56,000 28,000 CHEESE U.S. CHEESE EXPORTS - ROLLING QUARTERS U.S. CHEESE CUSTOMERS U.S. exports in the May-July period were 65,968 tons, down 10.6% vs. last month but still up 26.5% vs. last year. Year-to-date, shipments to Mexico were up 41% vs. prior year, while Japan (+34%) and Saudi Arabia (+34%) also posted strong gains. 85,000 71,000 57,000 43,000 29, ,000 36,000 27,000 18,000 9,000 BUTTERFAT U.S. BUTTERFAT EXPORTS - ROLLING QUARTERS U.S. BUTTERFAT CUSTOMERS U.S. exports in the most recent three months were just 9,424 tons, down 30.9% vs. last month and down 41.6% vs. last year. This year more than three-quarters of the volume went to the Middle East/North Africa region (primarily Saudi Arabia), while sales to Mexico and Canada have dropped off. 28,000 22,400 16,800 11,200 5, ,000 10,400 7,800 5,200 2,600 Source: USDA.

5 U.S. EXPORTS Whey Products 5 U.S. exports of whey products in the most recent three months were 128,936 tons, down 0.7% vs. last month but still up 10.7% vs. last year. China remains the major customer for U.S. whey products, with 2012 purchases up 7% vs. the prior year. WPC exports are up 30.4% year-to-date. U.S. TOTAL WHEY EXPORTS - ROLLING QUARTERS U.S. TOTAL WHEY CUSTOMERS 135, , ,000 90,000 75, ,000 88,000 66,000 44,000 22, China SE Asia Mexico Canada Japan U.S. DRY WHEY EXPORTS - ROLLING QUARTERS U.S. DRY WHEY CUSTOMERS 80,000 72,000 64,000 56,000 56,000 44,800 33,600 22,400 48,000 11, SE Asia China Mexico Canada Japan U.S. WPC EXPORTS - ROLLING QUARTERS U.S. WPC CUSTOMERS 75,000 64,000 53,000 42,000 31,000 70,000 56,000 42,000 28,000 14, China SE Asia Mexico Canada Japan U.S. WPI EXPORTS - ROLLING QUARTERS U.S. WPI CUSTOMERS 5,300 4,800 4,300 3,800 3,300 3,800 3,040 2,280 1, Canada China Mexico SE Asia Japan Source: USDA.

6 U.S. EXPORTS Other Products 6 Lactose exports are slightly lighter. In the May-July period lactose export volume was 77,062 tons, down 1.6% from the prior month and down 7.0% from last year. Shipments of food preps are running higher this year (14% year to date). Meanwhile, exports of fluid milk/cream are down 30% in U.S. LACTOSE EXPORTS - ROLLING QUARTERS U.S. LACTOSE CUSTOMERS 85,000 76,000 67,000 58,000 49,000 45,000 36,000 27,000 18,000 9, U.S. WMP EXPORTS - ROLLING QUARTERS U.S. WMP CUSTOMERS 24,000 18,000 4,200 3,360 12,000 2,520 6,000 1, U.S. FOOD PREPS (BLENDS) EXPORTS - ROLLING QUARTERS U.S. FOOD PREPS (BLENDS) CUSTOMERS 24,000 21,000 18,000 15,000 24,000 20,200 15,000 10,000 5, 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 25,000 20,000 15,000 10,000 5, Source: USDA.

7 U.S. EXPORTS 5 Year Trend 7 U.S. EXPORTS 165,000 Volume 142, ,000 96,000 73,000 AGGREGATE VOLUME, SELECTED PRODUCTS* VOLUME AND VALUE TOTAL DOLLAR VALUE Value (million $) In the first eight months of 2012, U.S. exports of dry ingredients (milk powder, whey, lactose), cheese and butterfat were 1,123,694 tons, up 6.6% from the previous year. Total export value was $3.57 billion, up 14.1%. Export volume of NDM/SMP (+9% vs. a year ago), cheese (+21%) and WPC (+30%) remain on track to establish new highs in *Volume includes SMP, WMP, food preps, whey, cheese, butterfat, lactose NDM/SMP CHEESE BUTTERFAT 460, , , ,000 92, , , ,000 96,000 48, ,000 80,000 60,000 40,000 20,000 TOTAL WHEY DRY WHEY WPC 480, , , ,000 96, , , , ,000 60, , , ,000 80,000 40,000 WPI LACTOSE WMP 20,000 16,000 12,000 8,000 4, , , , ,000 66,000 60,000 45,000 30,000 15,000 FOOD PREPS (BLENDS) FLUID MILK/CREAM (000 LITERS) TOTAL EXPORT VALUE (MILLION $) 100,000 80,000 60,000 40,000 20,000 80,000 64,000 48,000 32,000 16,000 5,200 4,160 3,120 2,080 1,040 Above charts: TOTAL YTD Source: USDA, USDEC.

8 U.S. powder output falls below year-ago levels: PAGE 9 8 Global Milk Production MILK PRODUCTION - CHANGE VS. PRIOR YEAR (000 MT) EU U.S. NZ AUSTRALIA ARGENTINA 1, (300) (600) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB* MAR APR MAY JUN JUL AUG SEP Production squeezed in EU, U.S. Milk production has pulled back significantly. Output from the five major exporters (EU, U.S., New Zealand, Australia and Argentina) was up just 0.6% in June and July. *Feb 2012 adjusted for leap day TOTAL MILK PRODUCTION FROM MAJOR EXPORTERS (000 MT*) EU-27 Milk deliveries were up just 0.3% in the May-July period. Poor weather has been a factor. Output continues to decline seasonally, with lower production in key regions including France, Ireland and the UK. UNITED STATES Milk production has been hampered by a severe summer drought and tight producer margins, particularly in the western region. Production was up just 0.4% in June-August. Cow numbers dropped 51,000 head in four months and slaughter rates are running 10-15% ahead of last year. NEW ZEALAND Producers are seeing a strong start to the 2012/13 season. Output was up 13.0% in the May-July period. AUSTRALIA Milk production was up 3.6% in June-August. DairyAustralia projects a 2.0% increase in ARGENTINA Milk deliveries were up 4.9% in May-July. 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.

9 MILK PRODUCTION Key Suppliers 9 EUROPEAN UNION MILK DELIVERIES (% CHG VS. PRIOR YEAR) NEW ZEALAND MILK PRODUCTION (% CHG VS. PRIOR YEAR) % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2 AUSTRALIA MILK PRODUCTION (% CHG VS. PRIOR YEAR) ARGENTINA MILK DELIVERIES (% CHG VS. PRIOR YEAR) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2-8.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2 *Q adjusted for leap day. U.S. Production U.S. MILK PRODUCTION (000 MT, 30 DAY MOS.) U.S. NDM/SMP PRODUCTION (MT, 30 DAY MOS.) U.S. CHEESE PRODUCTION (MT, 30 DAY MOS.) 7, , ,000 7,680 90, ,000 7,460 80, ,000 7,240 70, ,000 7,020 60, ,000 U.S. BUTTER PRODUCTION (MT, 30 DAY MOS.) U.S. DRY WHEY PRODUCTION (MT, 30 DAY MOS.) U.S. WPC PRODUCTION (MT, 30 DAY MOS.) 85,000 45,000 18,000 75,600 42,400 17,280 66,200 39,800 16,560 56,800 37,200 15,840 47,400 34,600 15,120 Source: USDA, EuroStat, DairyAustralia, DCANZ.

10 U.S. share of Mexico s SMP imports at 87% 10 World Dairy Trade IMPORTS, MAJOR BUYERS, SELECTED PRODUCTS SMP, WMP, CHEESE, BUTTERFAT, WHEY - ROLLING QUARTERS CHINA SE ASIA-5 RUSSIA MEXICO JAPAN ALGERIA (000 MT) China imports +24% in 2012 World trade volumes increased significantly from 2009 to 2011, but have plateaued over the last year. China and Mexico remain bright spots. In the January-August period, China imports were up 24% from a year ago. Imports were heavier than usual in August. This year, purchases of SMP, butterfat and whey are significantly above 2011 levels. China import volume is equivalent to 18% of the volume shipped by the top five suppliers (EU, New Zealand, United States, Australia and Argentina), a dramatic development since 2008, when China accounted for just 7% of shipments. Mexico imports were up 10% in the first seven months of the year, driven by a large gain in SMP purchases. Sales to Southeast Asia have grown slowly but steadily since last fall. Indonesia and Malaysia have registered small increases year-over-year, but the Philippines has cut back. Russia s imports in the first eight months were down 8% vs. a year ago, and off about 25% from the peak levels of fourth quarter Cheese imports were up 4% vs. last year, but butterfat purchases were down 30%. In the January-July period, Algeria imports were off 20% from the elevated levels of last year, due to lighter purchases of milk powder. SMP imports were down 30% and WMP imports were down 20%. Japan imports were up 7% in the first eight months of the year, led by an 11% gain in cheese imports. IMPORTS, MAJOR BUYERS, SELECTED PRODUCTS 1, (000 MT) Rolling quarters. Buyers include China, SE Asia-5, Russia, Mexico, Japan, Algeria. Products include SMP, WMP, cheese, butterfat and whey. Source: GTIS.

11 World prices have come off summer lows, still below 2011 peak: PAGE World Prices PRICE TREND - SMP, WMP, CHEESE, BUTTER, WHEY* ($/MT) SMP WMP CHEESE BUTTER WHEY 5, ,600 SMP, WMP, Cheese, Butter 4,540 4,080 3,620 1,480 1,360 1,240 Whey 3,160 1,120 *Mid-point of range. Milk powder, cheese and butterfat are Oceania; whey is EU. Buyers satisfied, stalling summer rally Source: USDA s Dairy Market News. World dairy prices have been generally steady over the last month, with buyers mostly covered through the end of the year and reluctant to bid prices higher until the supply situation is further clarified. Oceania supply is in good shape, but U.S. and EU milk production is lagging year-ago levels. Oceania prices have risen about 15% since their July lows, while European prices tacked on 20-25% but now have stalled. There s no immediate impetus for prices to move much in either direction, but we believe there s room for prices to come up further. Cheese, butterfat and whole milk powder prices still haven t come back to the levels reached in the first quarter of this year. And even though SMP prices have moved above year-ago levels, low stocks and low production are expected to keep the market well supported. Historically low inventories also means world dairy prices are more susceptible to supply shocks and subsequent price volatility. We still have concern about the impact of food inflation in the coming months. If consumer purchasing power is reduced, it could have a negative impact on dairy consumption. In addition, a heavy Oceania flush also could put pressure on prices. CURRENT PRICES $/MT, FOB SHIP (W/ CHANGE FROM LAST MO.) EUROPE OCEANIA SMP u 3,275-3,550 (-38) 3,100-3,475 (-13) WMP u 3,700-3,925 (+50) 2,950-3,450 (+50) Cheddar cheese u 3,950-4,300 (+25) 3,700-4,200 (+100) Butter u 3,925-4,250 (+88) 2,900-3,500 (+50) Butteroil u 4,450-4,850 (+50) 3,500-3,900 (+100) Dry whey u 1,200-1,400 (-63) 1,450-1,650 (+50) WPC-34% u NA 2,900-3,300 (+125) Lactose u NA 1,900-2,100 (NC) Source: USDEC.

12 WORLD PRICES 12 6 Year Trend SMP ($/MT) WMP ($/MT) OCEANIA EU US OCEANIA EU US 5,500 5,700 4,700 4,860 3,900 4,020 3,100 3,180 2,300 2, CHEDDAR ($/MT) BUTTER ($/MT) OCEANIA US OCEANIA EU US 5,600 4,940 4,280 3,620 2,960 6,400 5,420 4,440 3,460 2, DRY WHEY ($/MT) EU US 2,000 1,640 1, Source: USDA s Dairy Market News.

13 U.S. dollar down 6% vs. NZ dollar this year 13 Currency Exchange U.S. dollar fluctuating in recent weeks EXCHANGE RATES RELATIVE TO U.S. DOLLAR, EXPORTING COUNTRIES INDEXED TO JAN. 1, 2011 EURO NEW ZEALAND DOLLAR AUSTRALIA DOLLAR /5 2/5 3/5 4/5 5/5 6/5 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5 7/5 8/5 9/5 10/5 EXCHANGE RATES RELATIVE TO U.S. DOLLAR, IMPORTING COUNTRIES INDEXED TO JAN. 1, 2011 JAPAN YEN CHINA YUAN MEXICAN PESO KOREAN WON /5 2/5 3/5 4/5 5/5 6/5 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5 7/5 8/5 9/5 10/5 Top chart: If line is trending up, currency is strengthening vs. U.S. dollar (U.S. dollar is weakening). This is favorable for U.S. competitiveness. If line is trending down, currency is weakening vs. U.S. dollar (U.S. dollar is strengthening). This is unfavorable for U.S. competitiveness. Bottom chart: If line is trending up, currency is strengthening vs. U.S. dollar (U.S. dollar is weakening). This is favorable for exports, because it increases import purchasing power. If line is trending down, currency is weakening vs. U.S. dollar (U.S. dollar is strengthening). This is unfavorable for exports, because it decreases import purchasing power. Source: Oanda.com.