© 2016 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.

5201 East Terrace Drive, Suite 280 l Madison, WI 53718 l800-726-9928 l info@blimling.com

PROTEIN

marketsDairy Protein Market Trends and Outlook

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• Risk Management Strategy/Advisement

• Commodity Brokerage

• Market News and Information

• Projects / Consulting

• Outsourced Services

A Little About Blimling

3

Good News For Dairy

4

Paying Attention

5

Informing the Masses

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• The Dairy Haze

• Supplier Perspectives

• Market Forces

• Emerging Trends

• $$$$$

Journey From Milk To Protein

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• Milk is a complicated product. On one hand, it’s simply milk – something good to drink. On the other, it’s a collection of valuable components, each with different values and unique uses.

Massive Disaggregation

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Water (and Carb) Extraction

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A Capital Intensive Process

One pallet of WPC 80 requires approximately four tanker loads of whole milk

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Plenty of Co-Products To Manage

One truckload of MPC 85 requires twenty-four tanker loads of milk and generates two loads of cream and one and half loads

of permeate

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Margins Not Guaranteed• Assume plant processing 3 million pounds of milk daily

• Makes commodity cheddar, WPC 80 and dry permeate

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Volatility A Fixture

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Good Returns = Investment

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US A Primary World Supplier• US largest supply base for high protein whey

• Milk protein supplies more fragmented across regions

• Global buyers have plenty of sourcing options

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• EU milk production is….

o 6.8x bigger than New Zealand and 1.6x bigger than the US

But, The EU Matters…A Lot

EU NZUSA

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Quota Sunset Means More Milk

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• Unfettered EU milk flows required more regional processing capacity

• Sizable investment ($ billions) went into value-add proteins and infant formula

Wave of Major Investments

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Investments Skew European

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• New Zealand shifted focus, opened doors for US and EU

• US exporters are closing in on 50% global market share

A Very Crowded Export Market

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But, Global Demand Booming• Asia at near half of global whey protein imports

• China demand up sharply over past decade

• US attracting more imports, particularly from EU

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Where The Product Goes

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Stress For Buyers (And Sellers)

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• Greater price alignment among the major exporters

• Price variability remains based on different production mixes

A Global Marketplace

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Linkage To The Base Commodity

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• New whey protein capacity made supplies more abundant

• WPC 80 spot prices fell to levels not seen in 15 years

• WPI prices are down but to lesser degree

Surplus of Whey Proteins

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MPCs Tied to NDM/SMP

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China Matters For Milk Powder $

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• Global milk output up more than 2% over second half of 2015

• 2015 output grew 9 billion pounds – on par with Minnesota annual output

• Production gains coming at a time when protein markets are oversupplied

Global Milk Output Expanding

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New Zealand Woes• In second year with revenues under cost of production

• Producers rely heavily on milk powders and China demand

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Tapping The Brakes• EU milk growth must slow to help restore market balance

• Elevated payout prices giving EU producers signal to keep expanding

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A Slow (And Bumpy) Recovery

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• Good demand chipping away at surplus stocks

• Prices starting long and arduous climb up

• Delicate balance - prices can’t run up too high, too quick

• WPI prices may have room to fall given elevated premium to WPC 80

• Cheap whey solids allows for more wiggle room on plant margins

• MPC definitions expected to evolve, no standard of identity

Outlook Thoughts

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• Believe the dairy protein story

• Most processors incentivized to capture higher returns on their milk. How?

o Investing up the protein value chain: native whey, micellar casein, protein fractions, hydrolysates

o Greater product differentiation: unique functionality, color (i.e. white whey), rBST-free, Organic

• Right now, low prices could persist for 1-2 years due to supply-side pressure

• However, demand will one day outstrip supply and we know how that story ends

Looking Ahead

www.dairy.com/protein

A better way of doing business.

Blimling and Associates5201 East Terrace Drive

Suite 280

Madison, WI 53718

608.249.5030

www.blimling.com

Dairy.com3801 Parkwood Boulevard

Suite 300

Frisco, TX 75034

214.442.5928

www.dairy.com

© 2016 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.