The U.S. Whey Market

Mr. David L. Thomas

• CEO, American Dairy Products Institute

EWPA General Assembly, June 2016

U.S. Milk Production

U.S. Milk Production(Million Liters)

75,000

77,000

79,000

81,000

83,000

85,000

87,000

89,000

91,000

93,000• Average growth rate of 1.79% per year the last ten years – primarily driven by increased production per cow.

• 2015 production: 91.8 billion liters

+ 1.25% over 2014+0.65% in cow numbers+0.60% in production per cow (9,856 liter)

U.S. Milk Production1st Quarter of 2016 up 1% vs. prior year

20,000

21,000

22,000

23,000

24,000

Q1 Milk Production (million liter)

• Q1 milk production is up 1% vs. 2015 (adjusting for leap year).– 7,000 more cows (+.075%)– 0.92% increase in

production per cow

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

$24.00

Average Class III &Class IV Prices ($/CWT)

Class IV

Class III

• The average all-milk price paid to producers in 2015 = $17.11/cwt. 29% less than 2014. YTD 2016 is down another 7% vs 2015

• Class III (cheese milk) prices outpaced Class IV (powder/butter).

• April Prices

– Class III: $13.63/cwt(28.0 euro cents/liter)

– Class IV: $12.68/cwt

(26.0 euro cents/liter)

Weaker milk prices going into 2016

U.S. Dairy Commodities

1,000,000

1,100,000

1,200,000

1,300,000

1,400,000

1,500,000

1,600,000

1,700,000

1,800,000

1,900,000

2,000,000

• Butter production in 2015 of 840k MT was down .5% vs. 2014. (Growth in whole fat milk)

• Prices peaked at $6355/MT in Nov 2015, now at $4515/MT.

• Strong domestic consumption. Butter exports down 71% v. 2014.

Total U.S. Butter Production(000 MT)

Butter Prices

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

NASS/AMS Butter Prices$/MT

600

650

700

750

800

850

900

950

1,000

1,050

1,100• Milk powder

production in 2015 of 1,032k MT was down 1.6% vs. 2014.

• WMP production in 2015 of nearly 50k MT was up 5% over 2014.

• SMP/NFDM exports up 3% over 2014

Total U.S. NFDM/SMP Production (000 MT)

200

220

240

260

280

Q1 NFDM/SMP Production(000 MT)

• First quarter 2016 production of dry milk powder is down 5.6% over 2015.

• March Nonfat Dry Milk stocks are 7.5% below previous year.

• Weak prices due to global oversupply.

U.S. NFDM/SMP Production1st Quarter

U.S. Nonfat Dry Milk prices peaked at $4625/MT in 2014 and have continued to decline since – now at

$1650/MT

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

3,500

4,000

4,500

5,000

5,500

U.S. Cheese Production2002 – 2012 (000 MT)

• Total U.S. cheese production of 5.4 million MT in 2015, with Mozzarella and Cheddar the dominant products, accounting for 2/3 of production.

• Cheese production growth in 2015 was 3.40% compared to the 10 year CAGR of 2.94%.

Total U.S. Cheese Production

1,000

1,100

1,200

1,300

1,400

Q1 U.S. Cheese Production(000 MT)

• Cheese production is up 3% in Q1 vs. prior year.

• April cheese stocks at record levels – 552k MT (larger than any month in 32 years), 12% above last year – putting downward pressure on prices.

• Cheese exports down 14% from 2014

U.S. Cheese Production1st Quarter

U.S. Cheese PricesStable in Q1 - now in decline

(CME spot price now at $2900/MT)

$2,000.00

$2,500.00

$3,000.00

$3,500.00

$4,000.00

$4,500.00

$5,000.00

$5,500.00

U.S. Cheddar Cheese Prices$/MT

U.S. Whey & Lactose -

Production & Market Data

2015 U.S. Whey-based Ingredients Production

Total 1.38 Million MT

Dry Whey25%

Lactose27%

Permeate26%

WPC356%

WPC807%

WPI & Other Protein Fractions

3%

Modified Whey4%

Concentrated Whey2%

Total U.S. Dry Whey Production(000 MT)

380

400

420

440

460

480

500

520

540

560

580

• Dry whey production increased for the first times since 2010. 2015 production of 445.6k MT was up 12.7% from 2014.

• Stock levels only slightlyabove seasonal norms.

• Prices dropped 70% from their 2014 high of $1450/MT down to a low of $450. Showing some signs of recovery in 2016 ($522/MT in April)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

2012 2013 2014 2015 2016

Metric Tons

Dry Whey Stocks

$300

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

Jan-11 Jan-12 Jan-13 Jan-14 Jan-14 Jan-14

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Whey Powder Pricing

Dairy Industry39.5%

Prepared Dry Mixes & Dry Blends

23.6%

Nutraceuticals, Pharmaceuticals,

Special Dietary Use14.9%

Baking Industry4.1%

All Other Uses17.9%

U.S. Whey PowderDomestic Utilization in Food 2014

Total U.S. WPC Production(000 MT)

0

25

50

75

100

125

150

175

200

225

250

275Total

25 - 49.9%

> 50%

• WPC production of 224k MT in 2015 was down from the previous year (-8.3%)for the first time since 2009.

• Production of higher protein (> 50%) WPC was up 7.7% over the previous year to 124k MT; while lower protein WPC declined 23% from 2014 to 100k MT (less than high protein WPC for the first time).

• Per pound of protein – production was still down 2.5% vs 2014.

• Stocks levels are down 17% from last year, and down 38% from February peak.

• WPC 34 prices peaked in Q1 2014 at $3900/MT and bottomed out at $1166/MT in Dec2015. Starting to show some signs of recovery.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

2012 2013 2014 2015 2016

Metric Tons

WPC Stocks

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

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WPC-34 Pricing

Infant Formulas29.1%

Mainstream Nutrition

20.2%Dairy Industry15.6%

Baking Industry11.1%

All Other Uses24.0%

U.S. WPC34Domestic Utilization in Food 2014

U.S. WPC80Domestic Utilization in Food 2014

Sports Bars56.5%

Sports Powders20.7%

Prepared Dry Mixes & Dry Blends

4.9%

Mainstream Nutrition

3.6%

All Other Uses14.3%

100

150

200

250

300

350

400

450

500

550

• Lactose production was down 6.98% in 2015 over prior year – to 479,150 MT.

• No change in production in Q1 of 2016 vs. Q1 2015.

• Corrected stock levels for March 2016 were down 14% vs previous year and April stocks held steady.

• Prices bottomed out at $407/MT in Q4 of 2015 and are up 30% so far in 2016 to $530/MT (April)

Total U.S. Lactose Production(000 MT)

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

2012 2013 2014 2015 2016

Metric Tons

Lactose Stocks

$250

$450

$650

$850

$1,050

$1,250

$1,450

$1,650

$1,850

$2,050

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

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Lactose Pricing

Confectionery Industry

39.5%

Infant Formulas27.3%

Nutraceuticals, Pharmaceuticals,

Special Dietary Use9.3%

Institutional Use5.1%

All Other Uses18.8%

U.S. LactoseDomestic Utilization in Food 2014

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

• U.S. is largest producer globally. Up to 50% of production is exported.

• Includes both whey permeate (85% of total) and milk permeate

• Production and prices are not reported in the U.S.

• Est. approximately 1/3 of U.S. permeate not being processed

• While still primarily sold into feed market, food applications are growing

Estimated US Production of Dairy Permeate

Dairy Permeate Powder(MT)

Dairy Industry52.1%

Prepared Dry Mixes & Dry Blends

42.3%

Beverage Manufacturers

4.6%

All Other Uses1.0%

U.S. Whey PermeateDomestic Utilization in Food 2014

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

• WPI production for 2015 up 20.5% over 2014 at 44,547 MT.

• Production in Q1 2016 up 12% vs. the prior year.

• Stock levels have been building, with current inventory up 34% vs previous year.

• Prices are not reported in the U.S.

Total U.S. WPI Production (MT)

Sports Bars69.7%

Sports Powders14.0%

Sports Beverages11.2%

Prepared Dry Mixes & Dry Blends

1.1%

All Other Uses3.9%

U.S. Whey Protein IsolateDomestic Utilization in Food 2014

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Dry Whey WPC Lactose WPI

Q1 2012

Q1 2013

Q1 2014

Q1 2015

Q1 2016

Q1 Whey Product Production(000 MT)

• Whey powder production increased for first time in several years, driven by price vs. WPC/Lactose

• Overall WPC production is down – although higher protein WPC still growing (and generating more permeate).

• Decrease in Lactose/Permeate (1st time in 10 years) due to global oversupply/price – more permeate going into liquid feed.

• Growth of permeate sales into the food sector

• Export markets continue to be extremely important – accounting for 63% of whey products (down from 76% in 2014) and 75% of lactose (up from 67% in 2014) produced in 2015.

• Proposing a spot market for dry sweet whey at the CME – to improve price discovery for whey products

U.S. Whey: Key Issues

• Supporting the development of a Codex Standard for Dairy Permeate

• Addressing threats from non-dairy alternatives to permeate/lactose for feeding piglets

• GMOs becoming more and more of an issue – State of Vermont requiring labeling effective July 1. Congress still considering legislation to address the issue. FDA also considering new regulations to address what can be labeled as “natural”

• ADPI developing new industry standards for several new milk and whey-based ingredients:

– Colostrum powders

– Micellar Casein

– Whey Protein Phospholipid Concentrate

– Native Whey Protein

U.S. Whey: Key Issues

Overview of U.S. Dairy Exports

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

U.S. Dairy Trade Balance1996-2015

Imports Exports

U.S. Trade BalanceTotal Milk Solids, % of U.S. Production

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2014 2015

00

0 M

T

SMP/NDM

Cheese

Whey

Lactose

Other

Casein/MPC

1,65714% of U.S. production

1,79515.3% of U.S. production

Composition of U.S. Dairy Trade

2015 vs. 2014 (volume - total milk solids)

-80%-70%-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%70%80%90%

100%

Whey Lactose Cheese SMP/NDM

IceCream

Milk &Cream

Butter All Value

-14%

5%

-14%

3%

-8%

0%

-71%

-26%

U.S. Exports of Dairy Products2015 vs. 2014

Source: USDEC

Volume (000 MT)

*(000 liters) 468.5 360.2 316.7 559.7 59.6 98.0* 16.9 $5,362 mil.

0

100

200

300

400

500

600

MT

(00

0)

All U.S. Whey Exports63% of total U.S. production in 2015

U.S. Exports of All Dry Whey -by Type (Volume) 2015

Source: USDEC

468,465 MTWPC, 22%

Modified Whey, 26%

WPI, 8%

Milk Proteins, 6%

Sweet Whey, 38%

0

50

100

150

200

250

300

350

400

MT

(00

0)

U.S. Lactose Exports75.3% of total U.S. production in 2015

Summary: U.S. Dairy Sector

• Milk production continues to grow – although at a slower pace

• Cheese/Whey production utilizing a growing share of the milk

supply

• Global oversupply of dairy commodities is beginning to be

reflected in U.S. prices (butter being the only exception)

• Poor returns for dairy farmers – MPP not giving much relief

- California petitioning for a Federal Milk Market Order

• Export volumes down – due to stronger domestic demand &

dollar