November 2014doclibrary.com/MFR1313/DOC/November2014DairyMarketOutlook0622.pdfcompared to 34.41B liters in 2013/14. Brazilian imports are expected to fall 9.2% over the same period

January 2014

November 2014

Market Activity:

Cheddar block closed October at $2.14, down 4.25 cents from the beginning of the month. Cheddar barrel fell 3 cents to $2.11.

Cheese exports in August were 11.4% higher than a year ago - they comprised 7.4% of monthly cheese production. Year-to-date exports are equivalent to 7.7% of total cheese production.

November Class III milk traded in the $21-$22 range during October and closed just around 25 cents higher vs. a month ago. Fourth quarter average declined by $0.22/cwt to $21.34. The cheddar equivalent was priced at $.05 discount to the current spot market.

Calendar 2014 is pricing $2.1457 cheddar (down $.012 from last month) and $22.38 milk (down $0.50 from last month) which would be the highest average milk and cheddar block prices on record.

Production & Stocks:

Total cheese production in August was up 0.9% from a year ago. American cheese production was down 2% from the previous year. Total cheese output is up 2.5% year-to-date vs. the same period in 2013.

American-type cheese stocks in September were down -4.5% vs. last year and down 2.6% from August. Total cheese stocks were down -5.4% from a year ago and down -2.6% from August.

Milk production in September was up 4.1% from a year ago and production per cow was the highest for the month of September on record. The cow herd increased by 2,000 head from a month ago and was 0.6% higher than a year ago. Twenty-two states posted milk production gains and only Illinois posted a loss. California was up 1.5%, Wisconsin up 1.5%, Idaho up 2.4%, and New York up 2.7% vs. a year ago.

Dairy cow slaughter in September was down -8.1% from a year ago but up 7.5% from August.

Milk cost of production in September was up $0.45/cwt from August and was around 11% lower than a year ago.

Butter production in August was down -2.4% compared to last year. Inventories in September were down -37.3% vs. a year ago and declined by -11.5% from the previous month.

Butter exports in August plunged by -60.8% from the previous year and comprised 6.1% of monthly production.

Global

New Zealand gDT auction price index was up 1.4% at the second event in October. WMP was up 3.1%, SMP down 3.6%, AMF up 7.4%. Cheddar lost -1% while butter was up 3.9%.

Last month, the U.S. price for cheddar was at a $0.68 premium to Oceania cheddar but after the last auction, we are at a $0.78 premium. The latest AMS report shows Oceania cheddar was down at $1.7917/lb (while cheddar traded at the $1.3639/lb average during the last gDT auction), butter up at $1.3211/lb, and European butter up at $1.7010/lb.

Dairy: Market Changes Since Last Period

November 2014 Arthur Schuman Inc. - Confidential 2

Global food prices declined for the sixth month in a row in September. The UN FAO food index was down 6% from a year ago and reached the lowest since August 2010. Dairy price index was down 6.5% from August and down 24.9% from a year ago. SMP price declined the most. Price declines were due to higher export availability from Oceania and higher output of butter and SMP in EU. Elsewhere, the fall in SMP prices stimulated higher output of WMP.

Global milk supply in the major exporting countries was up 3.9% in August vs. a year ago. New Zealand milk production in August was up 4.5% vs. a year ago. European January-July milk production increased by 5.8% vs. the same period a year ago.

EU Private Storage Aid volumes declined by the end of October. The volume of SMP entered in storage during the second to the last week of October fell to 248 tons compared to an average of 2,000 tons/week over the five prior weeks. Butter volumes also declined.

EU production is around seasonal lows and year-over-year gains have been narrowing. Although farmer margins declined, favorable weather is supporting production.

Brazil government updated forecasts and expects milk output to rise by 29.8% to 44.7B liters by 2023/24 compared to 34.41B liters in 2013/14. Brazilian imports are expected to fall 9.2% over the same period. Brazil’s exports may rise by 34.7% to 185M liters in the next decade.

Russia will import dairy from India and Israel, adding new suppliers after the ban on European product. First batch of Israeli product may arrive by the end of the year while a list of approved Indian suppliers will be completed by the year-end as well.

Venezuela milk shortages worsened in recent months and the country plans to restart milk powder imports from New Zealand and Australia over the next two months.

Mexico is expected to increase domestic milk production in 2015 and hence slightly lower dairy imports. In 2013, spreadable processed cheese had the fastest growth in the country at 18%. Soft cheeses remain the most popular kind of cheese in Mexico but there is increased consumption of aged cheeses which are mostly imported.

Korea’s cheese sales increased by 11% to reach $449 million in 2013. Unprocessed cheese sales increased by 15% contributing 33% of total value sales of cheese that year, according to USDA research. Korea’s cheese production fell 1% in 2013 while imports increased by 10%. US market share was 50%. Cheese imports are expected to remain strong as consumption is growing. Mozzarella represented 59% of total value sales of unprocessed cheese in 2013. Gouda is becoming more popular due to its low level of salt.

Dairy News Highlights

November 2014 3 Arthur Schuman Inc. - Confidential

Dairy: What to Look for Over the Next Few Months

Bearish Sentiment: Bullish Sentiment:


Dairy inventories remained below year-ago levels during the high demand/low production season.

Cheese inventories were down 5.4% while butter inventories plunged 37.3% in September vs. a year ago. Low inventories create a vulnerable environment for supply shocks. They also support prices as inventories need to be re-filled.

It seems that both manufacturer and consumer expect lower prices. As such, manufacturers don’t rush to overproduce and build stocks at current price levels – which in return keeps inventories pressured in the short term.

Milk production is now in a seasonal downtrend while demand is seasonally higher.

Dairy exports remained slightly above year-ago levels for cheese. China’s import demand declined seasonally but may rebound later in the year.

Spot cheddar block price remained strong above $2.00 in September.

Milk futures softened but remained very strong compared to historic levels.

Participants that were squeezed out by China’s buying return to the market preventing a sharp decline in prices.

Global milk supply continued to increase in

major exporters compared to a year ago.

Russia’s ban on European dairy put global

prices under pressure. 30% of EU cheese

exports went to Russia. European Storage Aid

for cheese was terminated.

New Zealand milk production is at seasonal

peak. Weather conditions remain favorable and

output is running above the prior year levels.

US prices are uncompetitive relative to the other

major exporters. Lower exports will increase

domestic supplies.

U.S. cow herd continued to expand. Milk per cow

was record high for the months of May through

September relative to the same periods in prior

years. Milk production was up 4.1% in

September.

Milk prices remained strong but feed costs

continued to decline suggesting milk production

will continue to expand into 2015.

Spot prices and futures declined from

September highs.

China’s imports of dairy, and in particular

powders, slowed down significantly.

Seasonally, US prices tend to decline after Q4.

U.S. Export Data

U.S. dairy exports in August declined by 12% from a year ago and were down 7% from July. More competitive prices from Oceania and EU weighed on US exports.

Fluid milk export value was up 25% from a year ago. China significantly increased its imports of UHT milk vs. a year ago.

U.S. butter export value fell 60% from a year ago and was down 24% form July – due to the high pricing.

Dry milk product exports fell 9% from August and were 11% below a year ago.

Cheese export value was up 0.4% from July and up 23% from a year ago despite high prices. Total volume topped 31,000 tons for the ninth straight month. YTD, the highest growth in US cheese exports among the top ten destinations occurred in Saudi Arabia (up 80%), Australia (up 76%), and Japan (up 75%).

U.S. cheese imports were down 11% in August vs. a month ago but up 7% vs. a year ago.

November 2014 Arthur Schuman Inc. - Confidential 5

in 1M $ MOM YOY

Fluid Milk 22 6% 25%

Cheese 149 0.4% 23%

Butter 16 -24% -60%

Dry Products 393 -9% -11%

U.S. Exports -August 2014

NOAA updated U.S. winter forecasts and expects above-average temperatures in the western U.S. and New England. Below average temperatures are expected in the south-central and southeastern regions. Midwest may see below-average precipitation this winter. A warmer winter may further bring down gas prices.

WASDE raised record corn production estimates for 2014-15 to 14,475 million bushels. Soybean production is forecast at record 3,927 million bushels. Corn price may average $3.10-$3.70, revised 10 cents lower. As such, dairy farmers margins look solid in light of strong milk prices. WASDE expects 2015 Class III milk to average $17.25-$18.15, revised 5 cents lower.

USDA feed index in October was down 6.8% from last month and 29% below a year ago. The corn price, at $3.28 per bushel, was down 20 cents from last month and $1.35 below October 2013. Milk-feed ratio soared to 3.07 from 2.97 a month ago and compared to 2.10 a year ago. That reflects increased profitability that should continue to stimulate herd expansion and milk production.

Weather Monitor


China’s dairy imports in September fell 54% vs. a year ago and were 42% lower than in August.

Cheese imports were up 45.59% from a year ago – cheese imports from US increased by 29%. UHT milk imports rose 186.5% vs. a year ago. SMP imports were down 45% and WMP imports declined by 63% vs. a year ago – to the YTD low. It looks like China overbought milk powders in the first quarter of the year and still has sufficient supplies.

China’s dairy producer price index was 5.72% higher in September compared to a year ago but continued the downtrend started in March suggesting some improvement in production costs. Consumer price index for dairy declined 0.16% from August.

BNP Paribas forecasts China’s raw milk price to fall 10% in 2015. In the long term, corn prices in China may drop as the government will likely end its purchase program in the next couple of years, which may cause raw milk price to fall further. Citibank also believes China’s milk prices will fall in 2015. Credit Suisse doesn’t see milk price rebounding until H1 2015.

Chinese Dairy Highlights


New Zealand milk production season is close to its peak. So far, production is estimated 5% higher than a year ago. New Zealand dairy exports increased 21% from August but were 12% below September 2013. New Zealand’s trade deficit was the largest on record in September due to the lower dairy prices.

Higher supplies weighted on prices. Cheese price was at the lowest level since November 2012.

Fonterra’s CEO Theo Spierings believes current dairy commodity prices are well below “fair” value expected by global dairy producers. The company expects China’s demand may return closer to historic volumes of demand after December. Fonterra expects prices may recover in the next four to six months.

Fonterra plans to build two new high-efficiency milk powder dryers within a decade. New dryers would provide nine million liters of extra capacity.

New Zealand Highlights


Retail Sales – Grocery & Food Service

U.S. retail sales in September declined by 0.3% as slow wage growth continued to limit consumer purchasing power.

Grocery and Food & Beverage Store sales were unchanged from August but were up 2.3% from a year ago.

Restaurant sales increased by 0.6% from August and were 4.4% higher than a year ago.

Arthur Schuman Inc. - Confidential 9 November 2014

ISM Manufacturing PMI slowed down to 56.6% in September, still showing growth in manufacturing. US durable goods orders fell 1.32% in September from a month ago. Slower growth in Europe and China creates concern that demand for US products may be lower.

Unemployment rate declined to 5.9%, the lowest since July 2008. Median duration of unemployment increased to 13.2 weeks. Unemployment claims were at the lowest since mid-2000.

Housing starts increased by 6.27% in September.

CPI for all goods was up 0.08% from a month ago. Dairy costs continued to climb and the index was up 0.54%. Food at home index increased by 0.32% and food away from home grew at 0.31%.

Economic Indicators


Key Domestic Economic Indicators MetricVS. Prior

Month

VS. Prior

YearTrend

Mfg's Durable Goods Orders (Billion $) 241.63$ -1.32% 3.3% Worsening

ISM - Purchasing Managers Index 56.6% -4.07% 1.1% Worsening

Unemployment 5.9% -3.28% -18.1% Improving

Median Duration of Unemployment (weeks) 13.3 0.76% -18.9% Worsening

Initial Unemployment Claims 281 -6.02% -20.3% Improving

Personal Savings Rate 5.6% 3.70% 7.7% Improving

Consumer Spending (Trillion $) 11.97$ -0.16% 3.5% Worsening

Total Disposable Income (Trillion $) 13.13$ 0.12% 3.9% Improving

Housing Starts (Thousand) 1017 6.27% 17.8% Improving

CPI - All Goods (index 1982-1984 =100) 238.03 0.08% 1.7% Inflationary

CPI - Dairy 227.60 0.54% 4.9% Inflationary

Food at Home 241.65 0.32% 3.2% Inflationary

Food Away from Home 250.57 0.31% 2.7% Inflationary

Sources:

US Dept of Commerce (Bureau of Economic Analysis) Institute of Supply Management

US Census Bureau

US Dept of Labor

The U.S. economy expanded by 3.5% in the third quarter after a 4.6% growth in the second quarter. That was the strongest back-to-back readings since the end of 2003. Growth in domestic oil production is helping the manufacturing sector and limiting energy imports. Cheaper gasoline also supports consumer purchasing power - consumer spending increased by 1.8% in the last quarter.

FOMC statement shows the majority of the committee expect U.S. recovery to continue in 2015. Job market growth has not been very strong, but unemployment rate continued to decline. Inflation rate has been running below Feds target.

IMF downgraded its outlook for global economic growth next year to 3.8% citing weakness in the eurozone and slowdown in several emerging markets. China’s GDP is expected to slow down to 6.5% by 2016 compared to the 10.5% average before the crisis.

Global GDP Snapshot


Nation Latest Qtr 2014 est 2013

Chg from

Prior

Month

2014 vs

2013

US 2.3% 2.2% 1.9% p p

Japan -0.1% 1.0% 1.7% q q

China 7.3% 7.4% 7.7% tu q

UK 3.1% 3.0% 1.8% tu p

Canada 2.5% 2.3% 1.8% p p

Euro Zone 0.7% 0.8% -0.4% q p

France 0.1% 0.4% 0.3% q p

Germany 1.2% 1.5% 0.5% q p

Italy -0.2% -0.2% -1.9% q p

Russia 1.3% 0.3% 1.3% q q

Ukraine -5.1% -6.9% -1.0% q q

Australia 3.1% 3.0% 2.0% q p

NZ 3.9% 3.5% 2.7% tu p

India 5.7% 5.4% 5.7% p q

S Korea 3.2% 3.6% 2.8% tu p

Argentina 0.0% -1.0% 4.0% q q

Brazil -0.9% 0.3% 2.2% q q

Mexico 1.6% 2.5% 1.2% q p

Eastern Bloc 2.9% 1.8% 0.8% q p

Euro traded in the 1.25-1.285 range in October. The currency followed a downtrend since May through early October but re-traced some of the losses during the month. Nevertheless, economic outlook and policy differentials continue to point at USD strength vs. euro.

U.S. Fed terminated monthly bond purchasing program as labor market strengthened. The bank emphasized it will consider a wide range of information in deciding when to raise the federal funds rate. Most officials expect the raise will occur next year. That would provide additional support for the dollar.

US economy grew stronger than expected in the third quarter suggesting economic activity will continue to improve into 2015. EU economy, on the other hand, is suffering from tensions with Russia and its tepid recovery from crisis. Experts believe EU central bank will have to introduce new policy measures to revive the economy – which would weigh on EUR.

Currency: Market Changes Since Last Period


2014 2015

Euro/US$ Q4 Q1 Q2 Q3

Low 1.20$ 1.16$ 1.12$ 1.16$

Mean 1.29$ 1.28$ 1.27$ 1.25$

High 1.36$ 1.37$ 1.38$ 1.36$

2014 2015

Euro/US$ Q4 Q1 Q2 Q3

Low 1.22$ 1.17$ 1.14$ 1.10$

Mean 1.26$ 1.24$ 1.23$ 1.22$

High 1.30$ 1.32$ 1.33$ 1.35$

October Consensus Forecast

September Consensus Forecast

Class III: Technical Studies

Technical indicators signal to sell November-January contracts suggesting there is a higher potential for price declines in the medium-term. Outlook for February is neutral at present.

Technical indicators are very sensitive to market activity and new information would change these signals quickly.


10/31/2014

Technical Indicator Meaning Signal Meaning Signal Meaning Signal Meaning Signal

Bollinger Bands neutral buy buy buy

Commodity Channel Indicator neutral neutral neutral neutral

Directional Movement Indicator buy sell buy buy

ADX no trend no trend no trend trending

Exponential Moving Average downtrend downtrend downtrend downtrend

Fear/Greed greed fear fear fear

Min/Max Channels neutral neutral neutral neutral

Moving Average Convergence/Divergence downtrend up trend up trend up trend

Moving Average Oscillator neutral neutral neutral neutral

Parabolic Time/Price System downtrend uptrend uptrend uptrend

Relative Strength Index neutral neutral neutral neutral

Simple Moving Average downtrend downtrend downtrend uptrend

Stochastics neutral sell sell sell

Weighted Moving Average uptrend downtrend downtrend downtrend

Williams' %R neutral neutral neutral overbought

Average True Range lower trend support lower trend support lower trend support lower trend support

Hurst exp reversal exp reversal trend exp reversal

Moving Average Envelopes downtrend downtrend downtrend uptrend

Momentum neutral neutral neutral neutral

Rate of Change downtrend downtrend downtrend uptrend

Trender downtrend downtrend downtrend uptrend

Triangular Moving Average buy buy buy sell

Variable Moving Average sell sell sell sell

Summary Moderate Sell Moderate Sell Moderate Sell Neutral

January-15 February-15November-14 December-14

The net non-commercial position reached the highest level on record by mid-October. Speculators held more than twice as many long as short positions by the end of October which implies the majority believed milk futures still had potential to appreciate further in the short term.

Money managers increased net long position in the first week of October but reduced it during the rest of the month. By the end of October, money managers held just 10% more long than short futures reflecting expectations of possible price declines in the medium-term.

Commitments of Traders - CME


Forecasts: 2014 Class III Milk Futures

Pricing for H2 2014 declined by $0.65/cwt to $22.08/cwt by the end of October. H2 closed October at a discount to H1 despite a slight premium in September.

H1 2015 declined by $0.71/cwt from a month ago and priced around $17.26. Second half of 2015 priced at a $0.06/cwt discount to the first half of the year.


The latest round of forecasts is on average $.56 lower than a month ago. The range of forecasts is between $17.34 and $19.53 with a $18.32 average for the next twelve months.

The top range of forecasts projects higher milk prices than the current futures. Futures are close to the lower range of prices for November-March. However, futures are higher than the average forecasts for May-September 2015.

Forecasts: Class III Milk


$15.87

Forecasts: Cheddar Block Forecasts

Cheddar forecasts have been revised $.05 lower on average, but the top range of the forecasts was higher than futures for November-January.

The range of forecasts is between $1.69 to $1.87 with an average of $1.77 for the next twelve months.


12 Mo

Avg

Forecasts: 2014 Class III Milk Futures vs. Historical

Averages

2014 futures (red line) price at a 23-37% premium to the five year average for the rest of the year.

The current Q4 2014 futures are pricing a $2.7 cwt premium compared to the Q4 2013 average.

The futures premium in the second half of the year is less than it was in the first half suggesting normalization.

Arthur Schuman Inc. - Confidential 18

October Chart

November Chart

November 2014

Futures Market Compared to…

…a month ago

…half a year ago

…3 months ago

…a year ago

November 2014 19

November 2014

Milk futures declined in October after reaching record highs in September. Seasonally, the dairy market may have reached its peak and may see weaker prices approaching 2015. The fourth quarter average declined by $0.22/cwt to $21.34 in October.

CME spot prices declined from their September record highs as well. Cheddar block closed the month at $2.14, down 4.25 cents from the beginning of the month. Cheddar barrel fell 3 cents to $2.11. Butter was down $1.50 at $1.89. NFDM declined by 15.3 cents to $1.2425.

US milk production remained strong. Output was up 4.1% in September vs. a year ago. Production per cow was the highest for the month of September on record, following record high productivity for the months of May-August. All major states except Illinois posted year-over-year gains in September. California was up 1.5%, Wisconsin up 1.5%, Idaho up 2.4%, and New York up 2.7% vs. a year ago.

The U.S. cow herd increased by 2,000 head from August and was 0.6% higher than a year ago. Dairy cow slaughter in September was down -8.1% from a year ago but up 7.5% from August. High milk yield, cow herd expansion, and low feed costs suggest milk production trend will continue. Milk availability may increase significantly by early 2015.

Dairy inventories remained below year-ago levels supporting strong pricing. Total cheese stocks in September were down 5.4% year-over-year and down 2.6% from August. American cheese stocks were down 4.5% from a year ago and down 2.6% from a month ago. Butter stocks were 37.3% below a year ago and down 11.5% from a month ago.

Global dairy export supplies availability increased as New Zealand reached its flush season. European milk output is also running above year-ago levels while banned imports to Russia increased inventories. US exports declined 12% vs. a year ago in August as pricing was uncompetitive.

US powder prices tend to respond faster to the global market conditions as powder export volume is the highest among the dairy. As such, powder spiked ahead of cheese prices spurring Class IV to trade at a premium to Class III for the most of 2013 through March 2014. NFDM traded around $1.24 by the end of October, well below its $2s range in March. It seems likely that cheese prices will follow a downtrend as well, although at a lag. Inventories remained tight in light of seasonally lower milk supply, but milk production continued to increase vs. a year ago and milk availability for cheese production should rise into 2015. Higher domestic output coupled with lower exports should eventually replenish inventories and bring the prices down.

Summary

11/5/2014 Arthur Schuman Inc. - Confidential 20

FUTURES AND COMMODITIES TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION CONTAINED HEREIN IS STRICTLY THE OPINION OF ITS AUTHOR AND IS

INTENDED FOR INFORMATIONAL PURPOSES AND IS NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION TO BUY OR TRADE IN ANY COMMODITY OR SECURITY MENTIONED HEREIN.

INFORMATION IS OBTAINED FROM SOURCES BELIEVED RELIABLE, BUT IS IN NO WAY GUARANTEED. OPINIONS, MARKET DATA AND RECOMMENDATIONS ARE SUBJECT TO CHANGE AT ANY TIME. PAST

RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS

Documents

November 2014doclibrary.com/MFR1313/DOC/November2014DairyMarketOutlook0622.pdfcompared to 34.41B liters in 2013/14. Brazilian imports are expected to fall 9.2% over the same period