TOP 10 ISSUES IN U.S. DAIRY MARKETS. John Director, Market Intelligence American Farm Bureau Federation

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1 TOP 10 ISSUES IN U.S. DAIRY MARKETS +1 John Director, Market Intelligence American Farm Bureau Federation

2 Since 2013, Net Farm Income has declined by 46% or $56,000,000,000 Billion Passed 2014 Farm Bill #1 WEAK FARM ECONOMY Farm Value of Milk Billion $50 Since 2014, dairy farm receipts have fallen $15 Billion Decline is equivalent to $300K per dairy farm $120 $100 $40 $80 $60 $30 $40 $20 $20 Source: USDA ERS

3 #2 CHANGING CONSUMER PREFERENCES Millennial-headed households spend the least per person on food at home Millennials overtake Baby Boomers as America s largest generation Monthly Food-At-Home Expenditures, Dollars per capita Millennials (1981 to 1996) Gen X'ers (1965 to 1980) Baby Boomers (1946 to 1964) Traditionalists (<1946) Under 18 Traditionalists Baby Boomers Millennials 0 <$7,187 $14,375 to $19,999 $28,333 to $33,332 $50,000 to $99,999 Gen X'ers Annual per capita income, selected deciles Source: USDA ERS, U.S. Census Bureau

4 #2 CHANGING CONSUMER PREFERENCES Change in Sales of Milk Products Since Almond Milk Percentage Specialty Milk* Coconut Milk Rice Milk Soy Milk Organic Milk Whole Milk Conventional Milk Source: Wall Street Journal, USDA AMS * Includes Lactose Free

5 #3 SHIFT IN U.S. MILK PRODUCTION +30,654,000,000 Pounds of Milk Over Last Decade +1,186 +1,297 +3,760 +1,041 +6,725 +1,376 +3,761 +2,720 Change in U.S. Milk Production Over Last +17% Decade +3,616 Source: USDA NASS, AFBF Calculations

6 #4 MOO RE MILK COMING ONLINE U.S. Production: 250 Billion By , U.S. Avg. Milk Per Cow 25,000 20,000 15,000 10,000 5,000 - Milk Per Cow U.S. Milk Production USDA Forecast U.S. Milk Production F 2020F 2023F 2026F Source: USDA NASS, AFBF Calculations +38 Billion Pounds of Milk Coming Online Over Next Decade

7 +38 Billion #5 ACCESS TO PROCESSING CAPACITY More Dumping? Pounds of Milk Coming Online Over Next Decade Million Pounds Percent of U.S. Milk Production Dumped <1% Source: USDA NASS, AFBF Calculations, The McCully Group, CoBank, USDA AMS

8 Premiums Eroding in Mideast and Southeast Mailbox Milk Price Minus Class III, 2016 Average Minus 2008 Average #6 OVER-ORDER PREMIUMS Michigan* -$1.24 Source: USDA AMS, AFBF Calculations *Michigan had positive basis in 2008, now negative Range, $/cwt $1.50 $0.00 -$1.50 -$3.00 -$2.38 Florida $1.15 Northwest States

9 #7 EAT BUTTER, NFDM BURDENSOME U.S. and Europe Nonfat & SMP Inventory (1,000 MT) US NDM stocks EU commercial SMP stocks EU intervention SMP stocks Source: USDEC

10 #7 EAT BUTTER, NFDM BURDENSOME Percent of Milk Value Contribution of Fat to Class III Component % of Total Milk Value /1/01 10/1/02 7/1/04 4/1/06 1/1/08 10/1/09 7/1/11 Butterfat 4/1/13 Protein 1/1/15 10/1/ to 2014: 61% 2015 to Present: 47% 39% 53% Dollars per Hundredweight 10 Change In Impact on Class Prices $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 $0.96 $0.86 $0.59 $0.47 Source: USDA AMS, Dr. Brian Gould University of Wisconsin, AFBF Calculations

11 #8 FMMO PRICING FORMULAS FMMO Make Allowances by Commodity $0.00 Butter Cheese NFDM Whey Total Make Allowance $0.00 Class III Class IV -$0.50 Dollars per Hundredweight -$0.50 -$1.00 -$1.50 -$2.00 -$ $1.93 Source: USDA AMS, AFBF Calculations Class III -$1.44 Class IV -$1.17 Dollars per Hundredweight -$1.00 -$1.50 -$2.00 -$2.50 -$3.00 -$3.50 -$3.17 -$2.17 California 4a -$2.42 4b -$2.27 Includes f.o.b.

12 Percent of Production Captured in USDA Price Survey (10-YR Avg.) #8 FMMO PRICING FORMULAS 12% of Butter 35% of Cheese 46% of Whey 62% of Nonfat Source: USDA AMS, USDA NASS, AFBF Calculations 8% to 10% of Milk Solids Captured

13 Big Dairies Getting Bigger Where Has Farm Growth Been The Largest? +11 M #9 ECONOMIES OF SCALE +8 M +1.5 M Change in Milk Production per Farm Over Last Decade +3 M +11 M +17 M +6 M +16 M +7 M Change in Number of Dairy Operations, 2016 v Source: USDA NASS, AFBF Calculations

14 #10 ENHANCED RISK MANAGEMENT MPP 2015 to % of Milk Had Buy-Up in 2017 Secretary Purdue Allowed Farmers to Opt-Out of MPP in 2018 Premiums and Administrative Fees, $100 Million $12 Million in Payments to Producers Change in FMMO Pool Value Under IDFA/NMPF Class I Proposal Millions of Dollars $300 $200 $100 $0 -$100 -$200 -$ $50 Million Change in Pool From 2000 to Present: $0.002/cwt Added to 2017 Source: USDA FSA FOIA, IDFA/NMPF Policy and AFBF Analysis Using USDA AMS Data $2.2 Trillion Value of FMMO Pool 2000-Present

15 THE WORLD ACCORDING TO U.S. DAIRY Top Markets for U.S. Dairy In 2016, Mexico, Canada, China and South Korea Represented 50% of U.S. Exports Source: USDA FAS Top 10 Markets = 70% U.S. Exports

16 THE WORLD ACCORDING TO EU DAIRY Top Markets for EU Dairy In 2016, China, U.S., Saudi Arabia and Algeria Represented 41% of EU Exports Source: GTIS, Rabobank Top 10 Markets = 56% EU Exports

17 THE WORLD ACCORDING TO NZ DAIRY Top Markets for NZ Dairy In 2016, China, U.S., Australia and Japan Represented 40% of NZ Exports Source: GTIS, Rabobank Top 10 Markets = 64% NZ Exports

18 Thriving in uncertainty Tough prices, disruptive change, growth?

19 Global import demand has taken a step back in the face of the growing milk glut. 15% Year on year change in global import demand vs. exportable surplus 10% Yoy change 5% 0% -5% -10% Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Source: Rabobank, USDA, GTIS Demand Supply 2

20 China has maintained pace of imports while others have stepped back. Year on year import change 3 months to Nov Source: Rabobank, GTIS 3

21 Falling prices have taken a break from precipitous declines due to NZ drought fears. 7,000 6,000 5,000 USD/MT 4,000 3,000 2,000 1,000 - Source: USDA Butter SMP WMP Cheese 4

22 Intervention adds to pricing pressure, ensuring SMP price ceiling around $2,000/MT. EU intervention stocks by age European SMP price 500 2, Volumes currently on tender 2, USD/MT 2,200 2,000 1,800 Intervention buy price 50 0 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Source: Milk market observatory, EEX 1,600 1,400 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Lowest accepted price on tender Apr-18 5 Jul-18 Oct-18

23 With pricing pressure trickling down to the farm, production growth will slow. 6% Milk supply growth from the big 7 5% 4% Yoy change 3% 2% 1% 0% -1% -2% -3% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Rabobank Actual Forecast 6

24 Global economy on the cusp for an uptick in growth. Significant upside in global economic growth as developing markets get back on track Global GDP growth % 25% 20% 15% 10% 5% 0% -5% -10% 1980s recession Asian financial crisis Developing market slowdown Total CLI Source: Bloomberg GPD CLI 7

25 Even with some recovery, our midterm price remains below the 10 year average. 5,500 Global WMP prices and forecast 4,500 3,500 2,500 1,500 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Source: Rabobank, USDA Price Forecast 10 year average 8

26 NAFTA and other exogenous factors may derail the outlook. NAFTA withdrawal Big 3 relative market access by exported volumes 2 2 An EU stock release 2.2 mill MT Million MT SMP mill MT 1.83 mill MT e Global SMP trade EU stocks Source: Rabobank, Twitter, GTIS, USDA 9

27 Investments along the dairy value chain a US example. Low margins and disruptors pressuring dairy supply chain Dairy Processor / Coop Brands Distribution Retail/FS Consumer 10

28 And investments are responding accordingly. Dairy Processor / Coop Brands Distribution Retail/FS Consumer Foreign direct investment 11

29 A reminder of the markets we play in. Dairy exports by geo-pol risk Low Risk, 14% High Risk, 4% Risky, 30% Moderate Risk, 52% Source: Rabobank, GTIS, EIU 12

30 Conclusions Imports have slowed in the face of rising global milk supplies Prices have begun correcting to adjust supply growth Demand should pick up in 2018, but not enough to absorb stocks Low margins will precipitate consolidation and integration along the global dairy supply chain As US supply outstrips demand more milk will be pushed into the global markets, and investors from around the world will be eyeing how they might be best positioned to capitalize on the opportunity 13