Dairy, Commodities & The Global Economy

Blimling and Associates, Inc.

October 2009

Phil Plourd (pplourd@blimling.com)Bill Curley (bcurley@blimling.com)

Duane Banderob (dbanderob@blimling.com)Dallas Sipes Chapman (dsipes@blimling.com)

800-726-9928

SITUATION AND OUTLOOK

2

DOMESTIC CHEESE• Market has moved

over the $1.40/lb mark that has served as a key support/resistance area for the past several years

• Is the current peek above the line a preview of coming attractions – as was the case in the last part of 2003 and 2006?

3

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

30-May 25-Jul 19-Sep 14-Nov 9-Jan 6-Mar 1-May 26-Jun 21-Aug 16-Oct

CHEDDAR: US vs OCEANIA

US Block Oceania

weekly

source: CME, USDA/AMS

GLOBAL CHEESE• US product is a bit

more competitive in the world market vis-à-vis Oceania

• Major difference between now and 2007/08: Australia and New Zealand seem likely to have some product

4

DOMESTIC BUTTER

5

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

30-May 18-Jul 5-Sep 24-Oct 12-Dec 30-Jan 20-Mar 8-May 26-Jun 14-Aug 2-Oct

GLOBAL BUTTER PRICES

US Oceania EU

GLOBAL BUTTER• Fat market is in a

bit of disarray, with significant increases in Europe since early summer, a recent rally in Oceania and the US flat and in the middle

• Stocks seem to be ample between US holdings and EU intervention/PSA

6

GLOBAL NDM/SMP• Just like that,

powder prices are up 25-30% globally

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

Oct 24 Dec 19 Feb 13 Apr 10 Jun 5 Jul 31 Sep 25

NONFAT DRY MILK/SKIM MILK POWDER

AMS Central

NASS

Europe

Jan-Jun

Oceania

7

• Surge in whole milk powder prices in the monthly Global Dairy Trade auction has created a buzz

• Seems tied to pipeline filling and WMP production shortfalls in the EU (where butter/SMP production has been favored)

• Still: some wonder whether these are stirrings of something more across the dairy products complex

WHOLE MILK POWDER!

THE PRESSING QUESTION

•Is this going to be 2007/2008 all over again?

•Some things are the same:•Cyclical downturn in US production•Weak US Dollar• Improving developing economies

•Critical things are different:•Oceania is going to have product available•Stocks of dairy products are at decent levels•US consumer jittery and domestic economy is in early

stages of recovery from massive shock

MILK OUTPUT A BIT SOFTER

9

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09

MILK PRODUCTION: YEAR-OVER-YEAR CHANGE

California

Wisconsin

United States

• Production down year-over-year in August and September – first back-to-back declines since May/June 2004

• Interesting – and telling –divergence between the West and the Midwest

10

1,600

1,650

1,700

1,750

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

2,200

2,250

2,300

2,350

2,400

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

YTD DAIRY COW SLAUGHTER

40 weeks/thousand head

Source: USDA/AMS

HEAVY CULLING…• Year-to-date

slaughter activity is at the highest levels since 1996

• Year began with widespread agreement that US herd was too large by 250,000-400,000 head

• Herd contraction so far: about 175,000 head through August

• Heifer pipeline still strong…means slaughter activity has to be all the greater to get cow numbers down

11

…COW NUMBERS DOWN

• In reality, the current period of low prices is not especially extended relative to historical price troughs

• Now, however, we are in month 11 of the low price period…by virtue of the passage of time alone we are probably getting closer to the period’s end

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IT ALWAYS TAKES TIME

$8

$10

$12

$14

$16

$18

$20

$22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FMMO CLASS III MILK

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 F 2010 F*

Margin 7.84 7.48 6.13 7.68 5.69 5.91 8.03 7.66 6.05 9.29 7.57 4.99 7.36

-

1

2

3

4

5

6

7

8

9

10

"IMPLIED MARGIN OVER FEED"

US MARGIN OVER FEED• Implied Margin Over Feed is an index of

dairy producer milk revenue remaining after accounting for feed costs

• Years in which the index is less than ‘6’corresponds to years of supply-side contraction, while years above ‘6’ tend to be expansionary

• Producers have been getting mixed signals for months. “Real-time” margins are exceedingly poor, with June’s IMOF reading of 3.72 the lowest in our historical dataset. Meanwhile, futures prices portend better days ahead, with 2010 IMOF projecting to about 7.4. The presumptive challenge: continuing to survive today to get a taste of that better tomorrow.

• Of course the “better tomorrow” has been elusive, with prices consistently failing to live up to expectations conveyed by futures 60-to-90 days previously.

13

14

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NDM: AUGUST STOCKS

million pounds/commercial holdings

-

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006 2007 2008 2009

BUTTER STOCKS

CME

Other

Million Pounds/August 31

HEAVY STOCKS

600

650

700

750

800

850

900

950

1000

1050

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

TOTAL CHEESE STOCKS 2004-

million pounds

15

-10% -5% 0% 5% 10% 15% 20%

Frozen Pizza

Yogurt

Cheese

Butter

Fresh Milk

Ice Cream Bulk

Fresh Meat

Refrig Bacon

Pasta

Refrig Entrees

Juices/Drinks

Orange Juice

Cereal

Cookies

Can Vegetables

Frozen Entrees

Soup-Canned

RETAIL SALES (VOLUME): 4 WEEKS ENDING 10/3

Source: JP Morgan/AC Nielsen

Excludes Wal-Mart, club stores

RETAIL: SOLID

16

� Restaurant sales have been up some in dollar terms� Jan: +2.7%� Feb: +2.8%� Mar: +2.5%� Apr: +1.7%� May: +1.4%� Jun: +0.6%� Jul: +0.0%� Aug: +0.8%� Sep: +0.6%� 2004-2008 avg: +5.6%

� Customer counts down� Knapp-Track (Aug): -5%

-2%

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009

RETAIL SALES

Food and Drinking Place

Grocery

FOOD SERVICE SOFT

WORLD WEATHER

•India has been dry, reportedly creating shortfalls in milk production and escalation in dairy product prices…but first two weeks of new season were improved

•Australia remains in drought, limiting potential

•New Zealand season reportedly on track after a slow start

17

18

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Cheese 0.6% 0.7% 0.7% 0.7% 0.8% 0.7% 0.9% 1.2% 1.5% 1.0%

NDM/SMP 1.5% 1.4% 1.1% 1.7% 3.3% 3.9% 3.9% 3.4% 5.1% 2.6%

0%

1%

2%

3%

4%

5%

6%

7%

EXPORTS AS % OF MILK PRODUCTION

Source: USITC data; Blimling estimates

2009 through August

EXPORT GAP: STILL BIG• Is this the chart that

explains everything about where markets are at today?

CURRENCY

•Few are bullish the US Dollar

•Sense in some quarters is that the Administration is not especially eager to defend the US Dollar’s value…some even suspect that some sort of stealth devaluation is one way out of the mounting debt situation

•We would view currency has having a generally positive bias for US dairy prices, though the impact is not the same for every commodity

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FORECAST

20

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•©2009 Blimling and Associates Inc.

• 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

• Past performance is not indicative of future results

• This has been prepared for the exclusive use of clients of Blimling and Associates, Inc. Reproduction in part or in whole without written permission is strictly prohibited

•Want a copy of a slide or graphic? Contact Dallas Sipes Chapman at 800-726-9928 or by email at dsipes@blimling.com

THE FINE PRINT