1. April 2014 Dairy Commodity Market Situation & Outlook

2. Executive Summary Contrary to forecasts, dairy commodity prices were at or near record-high levels in Q1 driven by: Milk production in the US was not strong enough to keep pace with global demand as winter weather negatively impacted output and dairy farmers’ response to high milk prices/margins was cautious. Demand from China has been very strong and have exceeded most everyone’s estimates. The strong US export pace resulted in tight domestic supplies. But as Q2 begins, there are signs supply and demand dynamics are shifting to where they will be more in balance. As a result, prices are expected to come under further pressure as demand slows and the pace of supply growth increases. The US export pace is expected to slow in Q2 as demand eases and other suppliers increase production. NFDM/SMP (milk powder) prices are a leading indicator and are now showing signs of weakness due to lower NZ prices. At some point, weather conditions will be favorable for milk output across the US. With very strong margins for dairy farms, milk production is expected to move higher at a more robust pace. 2

3. Grain & Feed Costs Grain prices started 2014 at lower levels than the past few years. However, tight soybean stocks, fund buying, and concern over spring planting weather helped propel both corn and soybean prices 15-20% higher in Q1. Ethanol and livestock margins are very positive, which dull the impact of rising grain prices on the two largest grain using segments. While still quite profitable, higher grain prices will eat into dairy margins as the year proceeds and milk prices start to fall in Q2 and into the 2nd half of the year. 3

4. US Milk Production In a recurring theme, February milk production in the US was less than robust. Total milk output was up 1.1% with 7 of the top 23 states showing year-over-year declines, most from the winter weather- challenged Midwest. Importantly, several of the states with lower production are major cheese producers – Wisconsin, Minnesota, and New Mexico. Colorado (+6.0%) and California (+5.3%) were the top performers. With the eventual end of winter, milk production should start to show more robust gains across the country. Dairy farm margins are record high, but farmers have been cautious in ramping up production so far. The pace of growth should increase with forecasts of 2-4% milk production growth for the balance of the year. 4

5. Global Milk Production While milk supplies are slowly advancing in the US, milk production is posting larger gains in other key regions of the world. New Zealand output is up around 6% with projections to finish the season up 10%. While still down for the year, Australia milk production was up 3.1% in January. And milk output in the EU in January was up a strong 4.7%. These trends are likely to continue at least through the middle of 2014. 5

6. US Dairy Exports US dairy exports continue to post strong gains. In February, cheese, milk powder, dry whey, and WPC exports were all above January’s pace. On a year-to-date basis, cheese exports are up nearly 44 million pounds from 2013. When US prices were lower than Oceania and EU origins, the US gained market share and exports posted strong gains. That price advantage is now gone and will negatively impact exports into Q3. 6

7. Global Dairy Prices But storm clouds are forming on the horizon for US exports. Prices at the most recent Global Dairy Trade auction were down nearly 9%, continuing a 2-month downward trend. SMP traded at $1.87 (-10%) and below the CME NFDM price of $1.9975 (4/4). Butter was $1.83 versus $1.97 on the CME market. And the difference in cheese was the greatest – GDT at $2.01 compared to CME block of $2.35. 7 Source - GDT

8. China With dairy/milk shortages expected for another 3-5 years, imports continue to play an important role in supplying dairy products to Chinese consumers. And 2014 has started off with staggering amounts of milk powder imports. February volumes of SMP and WMP imports were off from January, but were more than twice as much as last February and were the 2nd highest month on record. New Zealand remains China’s main milk powder supplier, but other countries are increasing shipments as Chinese buyers either are diversifying their supply base or finding that New Zealand cannot supply all of their needs. Recent reports point to a slow-down in purchases as buyers work through stocks bought earlier. Going forward, some expect Chinese dairy import patterns to be similar to other commodities – heavy buying followed by periods when buyers either scale-back purchases or step out of the market completely 8

9. Cheese Cheese prices hit record highs twice in Q1, but are starting to recede. Prices are expected to be in the low $2.00 range in Q2 before falling into the $1.80-2.00 range for the 2 nd half. Cheese exports are expected to slow, but remain above year-ago levels. Cheese production is expected to increase with better milk production in key states (WI, MN, ID, NM). Demand is forecasted to slow given high retail prices and less foodservice usage 9

10. Class 1 Milk Class 1 milk prices (milk for fluid bottling) will see record highs into Q2 before declining in the 2 nd half of the year Retail fluid milk demand has seen losses for a number of months and will likely see continued losses for the 1 st half of the year driven by high prices Demand could rebound in 2 nd half with lower pricing 10