December 10, 2020Global Dairy Market Outlook

Mary Keough Ledman

Global Dairy Strategist

RaboResearch Food & Agribusiness

2

Rabobank is committed to the dairy sector

17 of the Top 20 Global Dairy players are Rabobank clients

of Rabobank’s total loan portfolio is committed to the Dairy sector

17/20

outstanding in Dairy (rural & wholesale)

$USD 25 billion>20%

87%87% of the Dutch dairy

farmers financed by Rabobank

3

The RaboResearch dairy team spans the globe

Richard ScheperAnalyst

Sao Paulo

Melbourne

Utrecht

Shanghai

Christchurch

Andres PadillaSenior Analyst

Michael HarveySenior Analyst

Shiva MudgilAnalyst

Mumbai

Emma HigginsSenior Analyst

Sandy ChenSenior Analyst

Chicago

Mary LedmanGlobal Strategist

Danielle Duijndam

Analyst

Ben LaineAnalyst

St. Louis

4

Key Themes

Global milk production outlook

Federal Order Pricing: Negative PPD’s

Global dairy demand outlook

5

Source: Rabobank

Global milk supply growth modest but rising

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f Q1f

2017 2018 2019 2020 2021 2022

billion liters

US Oceania EU South America

Forecast

6

Renewed enthusiasm in farm investments may reduce imports

Sources: Based on reports in the Chinese media collated by Rabobank

Lanzhou Animal Husbandry Co.Designed capacity (total head): 10,000

Mengniu China Dairy Industrial ParkTotal project size (total heads): Eventually 300,000

Yili Modern Smart Health Valley ChilechuanTotal project size (total heads): 300,000

Youran Farming (Yili associate) 3 new farmsDesigned capacity (total heads): 28,000

SK Xing (affiliated with Yili/Youran) 1 new heifer farmDesigned capacity (total heads): 3,500

Zhongken Dairy Phase 1Designed capacity (total head): 15,000Eventually total herd size: 60,000

Tianjin Food GroupDesigned capacity (total head): 11,000

YST Dairy Farming GroupDesigned capacity (total heads): 12,000

Zhejiang Yiming FoodDesigned capacity (total heads): 3,000

7

What are the drivers and implications?

Source: China Dairy Association, China Customs, Rabobank estimates

China dairy demand and gap into 2030: the alternative optimistic supply case

KEY DRIVERS

• Improved dairy farm profitability

• The government’s self-sufficiency

drive to hedge supply risks due to

geopolitical uncertainty

IMPLICATIONS

• Gap between domestic supply

and demand might narrow

initially (if all goes well) but will

widen again in the longer run as

supply growth is hindered by

resource constraints

• There are risks to the optimistic

supply case: price cyclicality vs

cost of production, pace of

consumption growth, availability

of breeding cattle

0

10,000

20,000

30,000

40,000

50,000

60,000

(1,0

00 M

etr

ic T

ons)

Production Additional Production (Alt case) Net import requirement (LME)

8

Global milk production summary

YOY Growth is expected from all key dairy exporters

Weather is always a factor to consider

The road to self-sufficiency may be rocky

9

Key Themes

Global milk production outlook

Federal Order Pricing: Negative PPD’s

Global dairy demand outlook

10

Federal Orders 101

• Federal milk marketing orders were set up in 1937 to establish:

1. to provide orderly marketing conditions for inter-state commerce,

2. to provide income parity for farmers, and

3. to increase bargaining power of farmers

• Three key functions of the Federal milk marketing orders include:

1. Classification of milk value based upon use

2. Calculation of the order’s weighted average milk price or Statistical Uniform Price,

also known as the “Blend Price”

3. Audit processors to assure that producers are paid the Blend Price

(Note: Cooperatives are not required to pay the Blend Price)

Source: Rabobank

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Class I Milk

Fluid Milk Yogurt Ice Cream Cheese Whey Milk PowderButter

Milk Producers are paid the weighted average price based upon how milk is utilized in their order.

$$$ $$ $$ $$

Federal Class Prices

Federal Order Classified PricingProcessors pay for milk based upon use/classification

Class II Milk Class III Milk Class IV Milk

Source: Rabobank

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• The October Class I price announced September 23 ($/cwt)–Adv. Class III price = $16.18–Adv. Class IV Price = $12.75–Adv. Base Class I Price ($16.18 + $12.75)/2 PLUS $0.74 or $15.20

oChicago Class I Differential = $1.80

oChicago Class I milk price at 3.5% butterfat = $17.00

• The October Class II, III and IV prices announced on November 4Class II price $13.63

Class III price $21.61

Class IV price $13.47

Timing matters: Class price announcements

Source: USDA, Rabobank

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Two examples: FMMO 30 Blend Price calculations

May2020

Millionlbs. Pool %

ClassPrice

Class I 220 7.9% $14.75

Class II 80 2.9% $12.30

Class III 2,332 83.9% $12.14

Class IV 146 5.3% $10.67

Blend $12.31

PPD atChicago Chicago $0.17

2.78 billion lbs.

Of milk in the

May 2020 pool

926 million lbs.

Of milk in the

October 2020 pool

67% less milk in the poolClass III

II & IVClass I

Class IIIII & IVClass I

Source: USDA, Rabobank

The difference between the Blend price and the Class III price is the Producer Price Differential or PPD

October2020

Millionlbs. Pool %

ClassPrice

Class I 226 24.4% $17.00

Class II 193 20.9% $13.63

Class III 384 41.5% $21.61

Class IV 123 13.2% $13.47

Blend $17.18

PPD atChicago $-4.43

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Summary: Contributing factors to negative PPDs

Source: USDA

Source: USDA

FMMO: Class Prices in US$ per Hundredweight

FMMO: Class I Utilization Percentage of Producer Milk

1. Volatility in commodity prices

2. Magnitude of difference in Class III and IV prices

3. Timing of Class I price announcement vs. Class II,

III and IV prices – basically six weeks difference in

commodity prices

4. New Class I milk price formula based on the

“average of Class III and IV plus $0.74” being

significantly less than the “higher of” Class III or IV

prices

5. Variation in volume of milk pooled due to liberal

pooling rules in some FMMOs

6. Long-term trend of lower fluid milk utilization as

US milk production increases

$10

$15

$20

$25

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20

Class I Class II Class III Class IV

0%

10%

20%

30%

40%

50%

60%

70%

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

15

Key Themes

Global milk production outlook

Federal Order Pricing: Negative PPD’s

Global dairy demand outlook

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Global dairy trade shows signs of headwinds

Source: Rabobank, USDA/FAS based on 2020 forecasts

Source: TDM, Rabobank

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Trade to China – driven by whey exports

Source: TDM, Rabobank

18

Trade to Mexico – less robust

Source: TDM, Rabobank

19

US dairy exports up 15% YTD October

Source: TDM, Rabobank

20

Exchange rates USD vs. exporters, 2014-2020

60

65

70

75

80

85

90

95

100

105

110

Jan-1

4

Apr-

14

Jul-

14

Oct-

14

Jan-1

5

Apr-

15

Jul-

15

Oct-

15

Jan-1

6

Apr-

16

Jul-

16

Oct-

16

Jan-1

7

Apr-

17

Jul-

17

Oct-

17

Jan-1

8

Apr-

18

Jul-

18

Oct-

18

Jan-1

9

Apr-

19

Jul-

19

Oct-

19

Jan-2

0

Apr-

20

Jul-

20

Oct-

20

Index c

urr

encie

s v

s.

USD

(Ja

n 2

014 =

100)

EUR AUD NZD

Source:Bloomberg, RaboResearch

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Current stock levels are manageableUS Butter Stocks (Million lbs.) Natural Cheese Stocks (Million Lbs.)NDM/SMP Stocks (Million Lbs.)

100

150

200

250

300

350

400

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

5yr Range 2020 2019

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

Mill

ion

lbs.

5yr Range 2020 2019

100

150

200

250

300

350

400

450

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

Mill

ion

Lb

s

5yr Range 2020 2019

Source: USDA, RaboResearch

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Global dairy demand summary

Government support provided relief through the crisis, but is less certain beyond Q4, elevating risk of lower prices

US $ weakness against competitors expected to spur US exports

Oceania is past its flush and US stocks are manageable

Economic recovery and vaccines could are likely to boost consumer confidence, supporting dairy demand – especially in foodservice

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