Global Dairy Trade (GDT) Auction Analysis

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1 Global Dairy Trade (GDT) Auction Analysis Tuesday, 17 December 2013 (Trading Event 106) The Year In Review 2013 has certainly been a period of growth and success for the Global Dairy Trade auction platform. In addition to the increase in volumes and the lengthy bull market, GDT added butter to its lineup of commodities along with a number of new sellers. Arla Foods added buttermilk powder and new sources of SMP from Europe to the auction and Euroserum became yet another European SMP seller over the past two months. Also, Indian processor Amul joined the platform in February, originally offering WMP but expanding their reach to SMP later in the year. Finally, US marketer Dairy America expanded their SMP specs/delivery periods and began selling butter mid-year. Land O Lakes announced earlier this month their intention to become an SMP and butter seller on GDT in The addition of sellers is only one side of the story. The average number of qualified bidders on the auction in 2013 has risen by 25% to 820 and those that participate are also up 12% to 185 from More and more buyers are viewing GDT as an acceptable procurement platform. However, the average number of winning bidders is down 9% to 114 this year versus last. Based on high WMP and SMP prices for most of this year, we suspect many buyers have been pushed out of the market. And finally, 2013 s global bull market in most dairy commodities offered on GDT has been one for the ages and may not have seen its peak this year. While many thought this year s bull story began with the season-ending drought in New Zealand (which did send Fonterra WMP prices from $3,620 to $6,255/MT between Feb & Apr - a 73% spike), the bull market has its beginnings during the tail end of New Zealand s 2011/12 production season when the weighted average price bottomed out in May Since that low, the GDT Price Index is up nearly 97%! But as the dairy industry is astutely aware, what goes up must come down and the global milk supply is growing year over year in most major dairy regions of the world has a lot of lingering questions that we are excited to dig into for our readers. Will Chinese demand remain steadfast due to a structural problem with their domestic milk supply or will high prices finally cause demand rationing? How quick will milk producers respond to high prices and when will we reach a point where regional players began to build inventories again? And will there be a weather event in 2014 dramatic enough to cause another supply disruption? Because with global powder stocks as tight as they are, any supply shortage could lead to even higher prices next year, though hard to imagine. HighGround Dairy s model is based on providing our customers with timely market intelligence & analysis along with our perspective of where we believe dairy markets are headed in the short and long term. But ultimately, we are in the risk management business and want to educate the global industry on methods to mitigate dairy price volatility. Education brings understanding and once this goal is accomplished, HighGround has the tools available to strategically plan and execute those strategies. We look forward to working with you to meet your company s hedging and trading goals in 2014 and beyond. Happy Holidays and a healthy, prosperous and blessed New Year to you and yours. -Eric GDT Average Winning Price (All Commodities)

2 Jan-14 Feb-14 Mar-14 Apr-14 May-14 GDT Price Index Up Slightly; Gains From Every Other Commodity but WMP The overall GDT Price Index managed to eke out a slight gain versus two weeks ago with support from every dairy commodity but whole milk powder. This is the third straight auction with GDT Price Index growth and at an average winning price of $4,990/MT ($2.26/lb), it sets a new all-time high. While this could be construed as bullish, declines on Fonterra WMP and SMP at this week s event shows that milk powders may be seeing some signs of peaking. Fat-based products showed substantial gains (AMF/butter) while casein prices spiked once again after Fonterra s announcement of negative stream returns on both cheese and casein. This news suggests lighter volumes of those products will be available later in the season. Since there is less global competition for casein than there is for cheese, buyers have taken to GDT to fight over what is being presently offered. Another key take away from this week s auction was price convergence in the skim milk powder complex. The spread between the low (Amul) and high (Fonterra) regular medium heat spec for February delivery was just $240MT. We view Tuesday s auction as neutral to bullish for all dairy commodities in the near term. Whole milk powder prices, while lower across the curve, are maintaining close to the MT level through May. And all other commodities continue ascending in a run that seems endless heading into However, we know better to think that a bull market has no end. But until there are clear indications that Chinese demand has subsided or milk production outperforms expectations in more regions than just New Zealand, the upward price trend will remain intact. remains steady to higher. That said, buyers should continue to remain cautious on being too aggressive with their hedged positions as markets at extreme levels can experience severe volatility in the near term. Whole Milk Powder: Slight Pullback This Week Fonterra WMP Down 5.1% since 1 Oct for Feb Delivery $5,500 GDT Fonterra WMP Forward Curve 5-Nov 19-Nov 3-Dec 17-Dec When comparing C4 (Feb delivery) from 1 Oct auction to C2 (Feb) at Tuesday s auction, Fonterra regular spec prices have fallen by 5.1%, or $265MT ($.12/lb) Declining prices combined with lighter volumes on offer may suggest a weakening sentiment that should be monitored However, the flat forward curve still suggests prices to remain close to MT for the foreseeable future Amul WMP prices also declined but maintained a narrow $125MT discount unchanged from last week

3 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Whole Milk Powder Detailed Auction Results Contract 2 Contract 3 Contract 4 Contract 5 (February) (March) (April) (May) Commodity $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. Whole Milk Powder $4,903 $2.22 $5,001 $2.27 $5,087 $2.31 $5,121 $2.32 Fonterra (regular) $4,885 $2.22 $4,985 $2.26 $5,070 $2.30 $5,115 $2.32 % vs. prev event -1.9% -1.5% -0.4% 0.7% Amul (regular) $4,760 $2.16 % vs. prev event -2.0% Skim Milk Powder Price Strength From All But Fonterra Price Convergence Rules The Day Fonterra did see moderate declines versus two weeks ago across the curve now closer in line with competing sellers only $240/MT separates the suppliers (med heat regular) Strongest price movement of regular spec SMP came from Dairy America in C1 & C2. Chicago Mercantile Exchange Grade A spot nonfat dry milk (NFDM) at a premium to GDT Another extremely strong auction for Dairy America medium heat upgraded spec, though this week s results appear to be an anomaly Fonterra SMP forward curve at a premium to spot while DA forward curve is inverted. Could US-sourced powder eventually be in higher demand than NZ? $5,500 GDT Fonterra SMP Forward Curve (Med Heat) 5-Nov 19-Nov 3-Dec 17-Dec Contract 1 Contract 2 Contract 3 Contract 4 Contract 5 Contract 6 (January) (February) (March) (April) (May) (June) Commodity $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. Skim Milk Powder $4,965 $2.25 $4,782 $2.17 $4,908 $2.23 $4,901 $2.22 $4,946 $2.24 $5,012 $2.27 Fonterra (med heat) $4,750 $2.15 $4,850 $2.20 $4,920 $2.23 $5,225 $2.37 $5,320 $2.41 % vs. prev event -3.8% -1.7% -0.8% -2.5% -7.4% Arla (med heat) % vs. prev event 1.7% Dairy America (low heat) $4,695 $2.13 $4,640 $2.10 $4,615 $2.09 $4,430 $2.01 $4,295 $1.95 $4,285 $1.94 $4,285 $1.94 % vs. prev event 6.3% 6.1% 3.6% 1.1% 1.2% N/A Dairy America (low heat upgraded) $4,665 $2.12 $4,480 $2.03 $4,345 $1.97 $4,335 $1.97 $4,335 $1.97 % vs. prev event N/A 1.8% N/A N/A N/A Dairy America (med heat) $4,640 $2.10 $4,615 $2.09 $4,295 $1.95 $4,285 $1.94 $4,285 $1.94 % vs. prev event 6.3% 6.1% 1.1% 1.2% N/A Dairy America (med heat upgraded) $5,460 $2.48 $5,455 $2.47 $5,465 $2.48 $5,460 $2.48 $5,470 $2.48 $5,735 $2.60 % vs. prev event 13.3% 11.3% 10.7% 6.2% 4.5% N/A Amul (med heat) $4,535 $2.06 $4,510 $2.05 % vs. prev event 3.9% 1.1% Euroserum (med heat) % vs. prev event 0.1% $4,625 $2.10 *According to the specs posted on GDT s website, Dairy America s upgraded skim milk powder has additional microbiological testing and standards for nitrates and nitrites while regular spec SMP does not.

4 $/MT Anhydrous Milkfat & Butter Fat-Based Products Remain in High Demand GDT C2 AMF Anhydrous milkfat and butter seeing strong gains heading into 2014 with substantial premiums baked into the back half of the AMF forward curve Fonterra C2 regular spec AMF price at $5,550MT ($2.52/lb), its highest level since June 2011 Converting AMF to an 82% fat equivalent price is presently at $4,404MT, exactly $2.00/lb. Compare this against Fonterra s C2 unsalted butter at $4,060MT ($1.84/lb). After five straight auctions carrying a premium to Fonterra C2 product, C1 Dairy America butter is back at a discount currently at -$80MT ($.036/lb) Contract 1 Contract 2 Contract 3 Contract 4 Contract 5 Contract 6 (January) (February) (March) (April) (May) (June) Commodity $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. $/MT $/lb. Anhydrous Milkfat $5,557 $2.52 $5,637 $2.56 $5,750 $2.61 $5,915 $2.68 $6,385 $2.90 % vs. prev event 3.2% 3.6% 6.6% 12.0% 13.8% Butter $3,980 $1.81 $4,060 $1.84 $4,080 $1.85 $4,011 $1.82 Fonterra (unsalted) $4,060 $1.84 $4,080 $1.85 $4,010 $1.82 % vs. prev event 8.6% 9.2% 8.5% Dairy America (unsalted) % vs. prev event -1.8% $3,980 $1.81 Cheese, Buttermilk Powder, Casein & Milk Protein Concentrate Contract 2 Contract 3 Contract 4 (February) (March) (April) Commodity $/MT $/lb. $/MT $/lb. $/MT $/lb. Cheddar Cheese $4,583 $2.08 $4,550 $2.06 $4,568 $2.07 % vs. prev event 2.5% -0.8% 2.5% Buttermilk Powder (Fonterra) $5,045 $2.29 $5,195 $2.36 % vs. prev event 1.7% 4.1% Rennet Casein $11,748 $5.33 $11,821 $5.36 % vs. prev event 9.1% 2.0% Milk Protein Concentrate $8,585 $3.89 $8,535 $3.87 % vs. prev event 5.1% 1.7% Casein extends its record highs at this week s auction after a 19.8% surge two weeks ago. After setting an eight month low last month, casein for February delivery spiked $2,066MT ($.94/lb) over the past two auctions which is the sharpest one month move of any commodity in GDT s history. But on a percentage basis, casein s one month spike was just +18% which pales in comparison to Fonterra WMP s +46% move for June delivery between March and April at the height of this year s New Zealand drought. Cheese prices saw nominal gains for February delivery but are not seeing anywhere near the kind of move that casein has fared. With US prices on the rise (and largely uncontested) at the Chicago Mercantile Exchange, it is a likely indication that global buyers have found more reliable suppliers for incremental demand in the states. Milk protein concentrate prices are also on the rise, up 16% since bottoming out in mid-october.

5 $/MT Global Dairy Trade Trends *All graphs are quoted in USD/metric ton GDT C2 Regular WMP GDT C2 Medium Heat SMP Fonterra Amul Fonterra DA Arla Euroserum Amul GDT C1 Dairy America Med Heat SMP GDT C1 Dairy America Low Heat SMP $5,500 $3,500 Regular Upgraded $3,500 Regular Upgraded GDT C2 Butter & AMF GDT Cheddar Cheese Butter AMF C2 C3 GDT C2 Rennet Casein GDT C2 Milk Protein Concentrate $12,000 $9,000 $11,000 $10,000 $8,000 $9,000 $8,000

6 About HighGround Dairy HighGround Dairy launched in 2012 by industry veteran, Eric Meyer. Affiliated with HighGround Trading Group, Eric is the President of its newly-created Dairy Division which services all those interested in trading dairy futures and options markets. Through the brokerage division and its related consulting company, HighGround Advisory Group, it specializes in dairy hedging, risk management and market analysis services for farmers & cooperatives, processors, manufacturers, distributors, traders and end-users. If you have questions or comments about our market analysis, have interest in signing up to receive our reports directly or have interest in trading dairy futures and options, please call or below. HighGround Dairy is a division of HighGround Trading Group, Inc ("HTG"). HTG is a registered Introducing Broker (IB) with the CFTC and Member of the National Futures Association. HTG makes no representations or warranties regarding the correctness of any information contained herein, or the appropriateness of any transaction for any person. All information, communications, publications, and reports, including this specific material, used and distributed by HTG shall be construed as a solicitation for entering into a derivatives transaction. HTG does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation Copying, reproduction, modification, distribution, display or transmission of any of the contents in this document for any purpose without the prior written consent of HighGround Dairy is strictly prohibited.