1. Nestle Cayuga Marketing
October 20, 2011

2. Sources of Risk for Dairy Farmers and Processors

4. Consequences of Extreme Price Volatility
Lost sales
Smaller share of retail price to dairy farmers and possibly processors

5. Recommended Solution: Multi Year Contract
Milk price base will be stabilized over a minimum of three years
Both parties will have the same average price with the contract term as if no stabilized price occurred
Neither party loses but both benefit due to a stable price
No hedging fees
No involvement of speculators

6. Stable Price Contract Elements
Milk price swings follow 3 year cycles so corresponding 3 year contract duration; Renewable for additional three year period(s)
Set initial target price based on preceding 3 year experience
Adjust quarterly to reflect cost changes
Option for Discussion: Producer and Processor pay equally into a reserve fund for “settle up” at end of 3 year duration or for rollover to next 3 years.

7. If Price Risk Mitigation had been in place last 6 years…
Target Price Reduces Price Volatility

9. Phased in Multi Year Contract
Initiation
Contract Months
Month
%/month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 3%
Settle up on contract