INGREDIENT. digest. Volume 3 Number 2 April 2018

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1 Volume 3 Number 2 April Still a tale of abundant farm milk supplies. Growing output in the US and EU continues to put a cloud over many product markets. Although producers are starting to feel the pinch of lower margins, milk flows are forecast to keep expanding for the balance of. Large product stockpiles continue to weigh on several ingredient categories. Shifting US trade policy between the US and China is impacting grain markets but dairy is off the list for now. The skim complex is stuck in neutral. Stocks are abundant and US / EU peak milk flows may only add to the pile. Commodity whey is on better footing. Highly competitive US prices have driven up exports in recent months. WPC 80 and WPI markets are sluggish, still hampered by oversupply. Demand prospects are reportedly improving but prices are generally unchanged. Lactose prices are stable. Stocks are still elevated but easing lower. Blimling Price Forecast ($ per lb) Market 1H '18 2H '18 FY '19 NZ WMP $1.40 $1.23 $1.17 US NDM $0.70 $0.77 $0.97 US Acid Casein $3.15 $3.11 $3.31 US WPC 80 $1.60 $1.70 $2.15 US WPC 34 $0.71 $0.71 $0.77 US Dry Whey $0.26 $0.29 $0.35 US Lactose $0.22 $0.24 $ Crossroads Drive, Suite 3900 Madison, WI info@blimling.com Blimling and Associates, Inc. This report is prepared for the exclusive use of Blimling and Associates clients. Reproduction in part or in whole without permission is strictly prohibited. This information is carefully compiled, but not guaranteed to be complete or free from error; nor does it constitute a solicitation to buy or sell futures/options contracts. Futures and options trading involves risk. Contact a licensed professional for more information.

2 Global Trends 2 Europe EU milk output started the year strong, growing 4% year-over-year in January. First quarter growth may not be as good, though, due to inclement winter weather in early March. Lower commodity prices are pulling farm prices lower, but February payouts near 35 were still likely above the breakeven for many. New Zealand Weather problems hurt New Zealand s milk production season. Despite some improvement, February output was still off 2% year-over-year, while season-to-date was down 0.2%. Reported culling of 20,000 cows, as a means to control disease, could slow regional supply growth towards the end of the season. United States The US dairy herd hit a 22-year high in February with 9.41 million head. Tight farm margins and increased slaughter rates (up 9% year-over-year) may slow herd expansion. Based on current futures, MPP calculations point to a $7.50 per hundredweight margin, the lowest since Argentina While an ongoing drought is plaguing Argentina crops, the country s milk production was still holding up through February. Output increased 14% from January, and firm pricing could help production stay strong. Export growth has also been supportive. For the year, WMP shipments rose 25% year-to-year.

3 Macro Influences 3 Global equity markets have turned volatile: bouncing back from an early February sell-off, but recently slumping again on escalating tensions around China and US trade. Dairy has not been directly implicated in the first couple rounds of tariff announcements. Tight freight markets are creating headaches and higher costs for many companies. Strong demand, limited capacity, few drivers and new regulations pushed rates higher.

4 Skim Milk Powder 4 Supply remains plentiful with more than a billion pounds of product in storage across the globe. Seasonally rising production won t help matters much, as additional milk should keep US and EU dryers churning out more NDM and SMP in the coming months. Demand may not be as good as China s January import activity initially implied. China s February imports sank after a hefty volume of imports to start the year, and March numbers aren t looking much rosier. Mexico is still buying for now. Imports in January topped 22,985 metric tons, up 19% year-over-year. NDM/SMP ($ per lb) Period EU US NZ 2015 $0.91 $0.90 $ $0.89 $0.83 $ $0.91 $0.87 $ Yr Avg $0.90 $0.87 $0.94 Q1 $0.76 $0.70 $0.85 Mo YoY % YTD YoY % China Import (Feb) 40 (11%) % US Mfg Stocks (Feb) % NDM/SMP Prices $1.30 $1.20 Q2 $0.70 $1.10 Q3 $0.74 Q4 Avg $0.80 $0.73 Q1 $0.87 Q2 $0.97 Q3 $1.00 Q4 $ Avg $0.97 $1.00 $0.90 $0.80 $0.70 $ $ per lb; USDA Range NZ EU US Forecast

5 Whole Milk Powder 5 WMP continues to bounce around the mid-$1.40s, holding a significant premium to the oversupplied SMP market. Barring a sizable shift in supply, a more balanced WMP market should maintain its premiums versus SMP. China demand was seasonally strong in January with a record 138,110 metric tons imported. Volume dropped back in February and early indications point to more of the same in March. Shipments to the Middle East are stronger, with imports up 16% year-overyear in January. And that s coming off strong end of the year numbers in WMP Forecast ($ per lb) Period EU US NZ 2015 $1.16 $1.30 $ $1.14 $1.30 $ $1.51 $1.44 $ Yr Avg $1.27 $1.35 $1.21 Q1 $1.42 $1.44 $1.40 $1.90 $1.70 WMP Prices Q2 $1.40 Q3 $1.29 Q4 $1.16 $1.50 $1.30 Avg $1.32 Q1 $1.12 Q2 $1.15 Q3 $1.18 Q Avg $1.21 $1.17 $1.10 $0.90 $ $ per lb; USDA Range US EU NZ Forecast

6 Milk Proteins 6 MPC markets are reportedly stable despite recent supply shifts. February US output fell 39% versus 2017 and 25% on a year-to-date basis. Imports did little to shore up soft output with inbound shipments down 3% through February. Pricing remains in the $2.30 to $2.60 range still low but at elevated NDM multiples. Both casein and caseinate markets remain snug. Plants in the EU and Oceania are reportedly running strong, yet healthy demand is keeping a firm bid in the market. New Zealand exports (casein and caseinates) are up 9% year-to-date while shifting its focus from the US to Asia. Acid Casein Forecast ($ per lb) Period High Low Forecast 2015 $ $ Yr Avg $3.42 $3.29 Q1 $3.15 Q2 $3.15 $2.90 $3.15 Q3 $3.20 $2.85 $3.12 Q4 $3.35 $2.80 $3.10 Avg $3.21 $2.93 $3.13 Q1 $3.45 $2.90 $3.15 Q2 $3.60 $2.95 $3.20 Q3 $3.80 $3.05 $3.40 Q4 $3.90 $3.15 $ Avg $3.69 $3.01 $3.31 Feb YoY % YTD YoY % US MPC Production 12 (39%) 27 (25%) US Casein Imports * 5 (39%) 13 (33%) * Trade data from tariff code $4.50 $4.00 $3.50 $3.00 $2.50 Acid Casein Prices $ $ per lb; USDA, Blimling Estimates Range Forecast

7 High Protein Whey 7 It s more of the same for the WPC 80 market, at least in the US. There s still too much product relative to prevailing demand, leaving prices near historic lows. Domestic production spiked in February, rising 19% over prior year. February stocks remain elevated, but suppliers did manage to cut holdings by 8% month-to-month. It s a similar picture for WPI: supply remains a problem and prices are down. Logically enough, US suppliers continue to trim production with February output down 12% year-to-year. Ostensibly, some plants are exercising flexibility by moving whey solids into products like WPC 80 and dry whey. But despite the cutbacks, warehouses still hold three months of output. The demand situation for high protein whey seems to be improving some. Several contacts cite increased buy-side activity on forward contracts. US high protein exporters appear to be leverage its competitive pricing position. Exports rose 8% through February, with growth driven by China and Japan. US high protein imports, on the other hand, fell 31% for the year, led by a dramatic decline in New Zealand shipments. Period High Low Forecast 2015 $ $ $ Yr Avg 2017 Avg 2019 Avg WPC 80 Forecast ($ per lb) $2.44 Q1 $1.60 Q2 $1.80 $1.30 $1.60 Q3 $1.90 $1.40 $1.65 Q4 $2.00 $1.55 $1.75 $1.83 $1.46 $1.65 Q1 $2.20 $1.60 $1.95 Q2 $2.50 $1.65 $2.10 Q3 $2.60 $1.75 $2.20 Q4 $2.75 $1.80 $2.35 $2.51 $1.70 $2.15 WPC 80 prices represent an estimated weighted average between contract and spot price levels Feb YoY % YTD YoY % WPI Stocks 27 13% High Pro US Demand 38 21% 69 11% $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 WPC 80 Prices $ $ per lb; Blimling Estimates Range Forecast

8 WPC 34/35 8 WPC 34 prices are drifting lower in the face of growing inventories. In March, average prices dipped below $0.70 for the first time since August Prices are down 27% from prior year, yet values remain elevated on a dry whey basis. US output is up slightly for the year while stocks have quietly grown since last summer. Inventories are at its highest since April Demand is reportedly mixed. Flexible users are leveraging $0.70 nonfat to access WPC 34 in the low to mid $0.60s. Meanwhile, sustained demand strength from infant nutrition has reportedly kept a strong bid on premium grades. WPC 34 Forecast ($ per lb) Period High Low Forecast 2015 $ $ Yr Avg $0.89 $0.79 Q1 $0.72 Q2 $0.65 $0.75 $0.71 Q3 $0.65 $0.77 $0.71 Q4 $0.65 $0.80 $ Avg $0.67 $0.76 $0.71 Q1 $0.66 $0.83 $0.72 Q2 $0.68 $0.87 $0.75 Q3 $0.70 $0.90 $0.78 Q4 $0.72 $0.93 $ Avg $0.69 $0.88 $0.77 Feb YoY % YTD YoY % US Production 13 (3%) 29 3% US Mfg Stocks 26 17% $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 WPC 34 Prices $ $ per lb; USDA Range Forecast

9 Sweet Dry Whey 9 Dry whey has found a degree of support in the past month. US supplies are still in decent shape, but a sustained discount to the EU is driving a notable bump in exports. US whey suppliers turned in another solid month in February, producing 15% more product compared to Local stockpiles dropped slightly from January but still remained 26% higher than a year ago. Solid exports into Asia are providing price stability. February whey exports totaled 42 million pounds, up 28% from Much of the increase came from China, where prickly trade dynamics could disrupt this upward momentum. Dry Whey ($ per lb) Period High Low Forecast 2015 $ $ Yr Avg $0.44 $0.38 Q1 $0.26 Q2 $0.28 $0.21 $0.25 Q3 $0.33 $0.22 $0.28 Q4 $0.37 $0.23 $ Avg $0.31 $0.23 $0.27 Q1 $0.41 $0.25 $0.31 Q2 $0.45 $0.27 $0.34 Q3 $0.47 $0.29 $0.36 Q4 $0.50 $0.31 $ Avg $0.46 $0.28 $0.35 Feb YoY % YTD YoY % US Production 89 15% % US Exports 42 28% 87 29% * Trade data from tariff code $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 Sweet Dry Whey Prices $ $ per lb; USDA Range Europe Forecast

10 Lactose and Permeate 10 The lactose market is holding steady. Output continues expand modestly, presumably in part to sustained growth in WPC 80 production. However, stocks are falling from strong exports, keeping inventories more balanced. February year-to-date exports jumped 17% over 2017, driven largely by a 61% spike in shipments to China. Permeate is a mixed bag. Supplies are reportedly healthy. Contacts report good export prospects with prices in line with lactose. Trade data, however, points to lower shipments the first couple months of. Domestic feed demand is sluggish with prices below $0.20 per pound. Lactose Forecast ($ per lb) Period High Low Forecast 2015 $ $ Yr Avg $0.34 $0.28 Q1 $0.22 Q2 $0.23 $0.18 $0.22 Q3 $0.26 $0.18 $0.23 Q4 $0.28 $0.20 $0.25 Avg $0.25 $0.19 $0.23 Q1 $0.30 $0.21 $0.26 Q2 $0.34 $0.22 $0.29 Q3 $0.36 $0.24 $0.32 Q4 $0.38 $0.26 $ Avg $0.34 $0.23 $0.30 Feb YoY % YTD YoY % US Mfg Stocks 117 4% US Exports * 74 27% % * Trade data from tariff codes and $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 Lactose Prices $ $ per lb; USDA, Blimling Estimates Range Forecast