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Top Five2018 Dairy Markets

TiffanyLaMendola•2017WesternAlfalfa&ForageSymposium

#1It’s all about the EU

3

In2016TheMarketLearned…

• EU milk production is….a big deal.• 6.8x bigger than New Zealand and 1.6x bigger than the USA• Imagine the headlines: New Zealand up 19%

EU NZUSA

4

EUMilkStilltheStory• Milk production increased +4.3% in September• Strong growth expected to continue (weak y-o-y comparison helps)• Milk prices at highest level since 2014…but how long will they hold?

5

ASoberingLook?

#2US Milk Production

(Oceania too)

7

USMilk:NoProblem

8

CowPower• US herd at 9.400 million head in October – up 65,000 vs 2016• September/October the first month-to-month declines in a year

9

VariesByRegion• Texas has been in growth mode• California in consolidation/contraction

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NZPilingOn?• Season got off to a wet, slow start• No problems in sight now• Improved milk prices at the farm

#3Dairy Producer Margins

12

USMarginNotTerrible onPaper

13

But…RegionalDisparities

14

• Long-run, ongoing trends• Consolidation• A focus on productivity• Diversification• Environmental• Labor

• Current conditions• Lower milk prices• California cow numbers down • Margins• Other income down

CaliforniaProductionDown

15

• Tree nuts, particularly almonds, widely viewed as a steady source of income to offset variable dairy returns

• Labor and environmental issues

• The lifestyle appeals too• To water the trees or to

water the corn…? That’s the question…

Diversification:FriendorFoe?

16

BehindTheScenes• Dairy producer cattle income is down considerably versus 2015 highs• As much as $1 per hundredweight?

#4Demand, Demand,

Demand

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USDemandNothingSpecial• Through September, we estimate US cheese use up by about 1% --

down from bigger numbers in 2016 and 2015• Fat no longer in favor? Butter use lackluster

19

FluidMilk,YogurtSlow• Conventional fluid milk sales down 1.3% in 2016, still soft in 2017• Losing streak: seven years, 6.8 billion pounds• Yogurt sales down by nearly 10% by some measures

20

ExportsHoldingUp

#5Inventories

22

PlentyofCheese

23

PlentyofButterToo

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WAYTOOMUCHPowder!• EU Intervention program holds 800 million pounds of SMP• US manufacturers’ stocks are at highest level since 2009

Where are we at?Where are we going?

26

Powder:PricesTumbling

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• Prices elsewhere in the world have drifted lower

• US prices fluctuating within a range

Cheese:ComingUnderPressure?

28

• Prices in the US have been at elevated levels all year

• After surging in late summer, EU butter prices have recently slipped considerably

• Export potential for US?

Butter:LikelyToRemainVolatile

29

WhereToFromHere?

Bulls• Peak demand season ends

strong • Economy spurs demand• Export sales grow

• China?

• Milk production becomes fragile quicker than expected

Bears• Large inventories• Lackluster demand• EU milk production up• NZ milk production up• US milk production stays

strong longer than expected

30

WhenCornisLessThan$4…• History says don’t expect milk prices to be too high if corn is low• Historically, $3.75 corn is equal to about $14.50 milk

31

LookingAhead• Futures currently project fair-to-midland 2018 California All Milk price • Given relative feed prices and milk prices, margins tighter than other

regions

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Madison,WI53718608.249.5030

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©2017BlimlingandAssociates,Inc.ThisreportispreparedfortheexclusiveuseofBlimlingandAssociates’clients.Reproductioninpartorinwholewithoutpermissionisstrictlyprohibited.Thisinformationiscarefullycompiled,butnotguaranteedtobecompleteorfreefromerror;nordoesitconstituteasolicitationtobuyorsellfutures/optionscontracts.Futuresandoptions

tradinginvolvesrisk.Contactalicensedprofessionalformoreinformation.