SITUATION AND OUTLOOK

Dairy, Commodities & The Global Economy

Blimling and Associates, Inc.

October 2009
Phil Plourd (pplourd@blimling.com)
Bill Curley (bcurley@blimling.com)
Duane Banderob (dbanderob@blimling.com)
Dallas Sipes Chapman (dsipes@blimling.com)
800-726-9928
DOMESTIC CHEESE
• Market has moved
over the $1.40/lb
mark that has
served as a key
support/resistance
area for the past
several years
• Is the current peek
above the line a
preview of coming
attractions – as
was the case in the
last part of 2003
and 2006?

2
 GLOBAL CHEESE
• US product is a bit CHEDDAR: US vs OCEANIA
more competitive $2.40
in the world
market vis-à-vis $2.20

Oceania
$2.00
• Major difference
between now and $1.80

2007/08: Australia
and New Zealand $1.60

seem likely to have $1.40

some product US Block Oceania

$1.20
weekly
source: CME, USDA/AMS
$1.00
30-May 25-Jul 19-Sep 14-Nov 9-Jan 6-Mar 1-May 26-Jun 21-Aug 16-Oct

3
DOMESTIC BUTTER

4
 GLOBAL BUTTER
GLOBAL BUTTER PRICES • Fat market is in a
$2.20 bit of disarray,
with significant
$2.00 increases in
Europe since early
$1.80 summer, a recent
rally in Oceania
$1.60 and the US flat and
in the middle
$1.40
• Stocks seem to be
$1.20 ample between US
holdings and EU
$1.00
US Oceania EU
intervention/PSA
$0.80
30-May 18-Jul 5-Sep 24-Oct 12-Dec 30-Jan 20-Mar 8-May 26-Jun 14-Aug 2-Oct

5
 GLOBAL NDM/SMP
• Just like that, NONFAT DRY MILK/SKIM MILK POWDER
powder prices are $1.40
AMS Central
up 25-30% globally NASS
$1.30 Europe
Jan-Jun
Oceania
$1.20

$1.10

$1.00

$0.90

$0.80

$0.70
Oct 24 Dec 19 Feb 13 Apr 10 Jun 5 Jul 31 Sep 25

6
 WHOLE MILK POWDER!

• Surge in whole milk powder prices in the monthly Global Dairy Trade
auction has created a buzz
• Seems tied to pipeline filling and WMP production shortfalls in the EU
(where butter/SMP production has been favored)
• Still: some wonder whether these are stirrings of something more across
the dairy products complex

7
 THE PRESSING QUESTION
•Is this going to be 2007/2008 all over again?
•Some things are the same:
• Cyclical downturn in US production
• Weak US Dollar
• Improving developing economies
•Critical things are different:
• Oceania is going to have product available
• Stocks of dairy products are at decent levels
• US consumer jittery and domestic economy is in early
stages of recovery from massive shock
MILK OUTPUT A BIT SOFTER
MILK PRODUCTION: YEAR-OVER-YEAR CHANGE • Production down
12% year-over-year in
August and
10%
California
September – first
8%
Wisconsin
back-to-back
6% United States declines since
May/June 2004
4%

2%
• Interesting – and
telling –
0% divergence
-2% between the West
and the Midwest
-4%

-6%
Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09

9
 HEAVY CULLING…
• Year-to-date
slaughter activity YTD DAIRY COW SLAUGHTER
2,400
is at the highest 2,350 40 weeks/thousand head
levels since 1996 2,300 Source: USDA/AMS
2,250
2,200
2,150
2,100
2,050
2,000
1,950
1,900
1,850
1,800
1,750
1,700
1,650
1,600
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

10
…COW NUMBERS DOWN
• Year began with
widespread
agreement that US
herd was too large by
250,000-400,000 head
• Herd contraction so
far: about 175,000
head through August
• Heifer pipeline still
strong…means
slaughter activity has
to be all the greater
to get cow numbers
down

11
 IT ALWAYS TAKES TIME
FMMO CLASS III MILK • In reality, the current
$22
period of low prices is
$20
not especially
$18 extended relative to
$16 historical price troughs
$14
• Now, however, we are
$12 in month 11 of the low
$10 price period…by
$8
virtue of the passage
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
of time alone we are
probably getting
closer to the period’s
end

12
 US MARGIN OVER FEED
"IMPLIED MARGIN OVER FEED" • Implied Margin Over Feed is an index of
10 dairy producer milk revenue remaining
9 after accounting for feed costs
8
• Years in which the index is less than ‘6’
7 corresponds to years of supply-side
6 contraction, while years above ‘6’ tend to
5 be expansionary
4
• Producers have been getting mixed
3 signals for months. “Real-time” margins
2 are exceedingly poor, with June’s IMOF
1 reading of 3.72 the lowest in our
- historical dataset. Meanwhile, futures
Margin
1998
7.84
1999
7.48
2000
6.13
2001
7.68
2002
5.69
2003
5.91
2004
8.03
2005
7.66
2006
6.05
2007
9.29
2008
7.57
2009 F 2010 F*
4.99 7.36
prices portend better days ahead, with
2010 IMOF projecting to about 7.4. The
presumptive challenge: continuing to
survive today to get a taste of that better
tomorrow.
• Of course the “better tomorrow” has
been elusive, with prices consistently
failing to live up to expectations
conveyed by futures 60-to-90 days
previously.

13
 HEAVY STOCKS
NDM: AUGUST STOCKS
TOTAL CHEESE STOCKS 2004- 200
million pounds/commercial holdings

1050
million pounds 150

1000
100

950
50
900
0
850 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

800 BUTTER STOCKS

350
Million Pounds/August 31
750 300 CME
Other
250
700
200

650 150

100
600 50

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 -

2001 2002 2003 2004 2005 2006 2007 2008 2009

14
 RETAIL: SOLID
RETAIL SALES (VOLUME): 4 WEEKS ENDING 10/3
Frozen Pizza
Yogurt
Cheese
Butter
Fresh Milk
Ice Cream Bulk
Fresh Meat
Refrig Bacon
Pasta
Refrig Entrees
Juices/Drinks
Orange Juice
Cereal
Cookies
Can Vegetables Source: JP Morgan/AC Nielsen
Frozen Entrees Excludes Wal-Mart, club stores
Soup-Canned

-10% -5% 0% 5% 10% 15% 20%

15
 FOOD SERVICE SOFT
RETAIL SALES
Restaurant sales have been
12%
Food and Drinking Place up some in dollar terms
10% Grocery
Jan: +2.7%
8%

Feb: +2.8%

Mar: +2.5%
6%
Apr: +1.7%
4%

May: +1.4%

Jun: +0.6%
2%
Jul: +0.0%
0%
Aug: +0.8%

Sep: +0.6%
-2%
2006 2007 2008 2009

2004-2008 avg: +5.6%

Customer counts down

Knapp-Track (Aug): -5%

16
WORLD WEATHER
•India has been
dry,
reportedly
creating
shortfalls in
milk
production
and escalation
in dairy
product
prices…but
first two
weeks of new
season were
improved
•Australia
remains in
drought,
limiting
potential
•New Zealand
season
reportedly on
track after a
slow start

17
 EXPORT GAP: STILL BIG
EXPORTS AS % OF MILK PRODUCTION • Is this the chart that
7% explains everything
6%
Source: USITC data; Blimling estimates about where markets
2009 through August

5%
are at today?
4%

3%

2%

1%

0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Cheese 0.6% 0.7% 0.7% 0.7% 0.8% 0.7% 0.9% 1.2% 1.5% 1.0%
NDM/SMP 1.5% 1.4% 1.1% 1.7% 3.3% 3.9% 3.9% 3.4% 5.1% 2.6%

18
 CURRENCY

•Few are bullish the US Dollar

•Sense in some quarters is that the Administration is not especially eager to defend
the US Dollar’s value…some even suspect that some sort of stealth devaluation is
one way out of the mounting debt situation
•We would view currency has having a generally positive bias for US dairy prices,
though the impact is not the same for every commodity

19
FORECAST

20
 THE FINE PRINT
• ©2009 Blimling and Associates Inc.
• This information is carefully compiled but not guaranteed
to be complete or free from error, nor does it constitute a
solicitation to buy or sell futures/options contracts
• Past performance is not indicative of future results
• This has been prepared for the exclusive use of clients of
Blimling and Associates, Inc. Reproduction in part or in
whole without written permission is strictly prohibited
• Want a copy of a slide or graphic? Contact Dallas Sipes
Chapman at 800-726-9928 or by email at
dsipes@blimling.com

21