digest

© 2017 Blimling and Associates, Inc. This report is prepared for the exclusive use of Blimling and Associates’ clients. Reproduc-tion in part or in whole without permission is strictly prohibited. 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. Futures and options trading involves risk. Contact a licensed professional for more information.

2810 Crossroads Drive, Suite 3900 Madison, WI 53718 800-726-9928 info@blimling.com

INGREDIENT Volume 2 Number 4

August 2017

Beyond butter, plentiful supply continues to dominate the storyline for most dairy product markets. And, given expectations for sustained milk production growth – particularly in the US – that abundance won’t likely subside any time soon.

The SMP market is quiet. Solid export demand from Mexico and China has been offset by surplus stocks in the EU and US.

WMP continues to hold a substantial premium to SMP thanks to strong Asia demand.

Acid casein prices remain high due to constrained supplies and slack demand.

The WPC 80 market continues to soften as US supplies pile up and historically low WPI prices weigh.

Despite a limited supply base, WPC 34 prices are drifing lower with the rest of the whey complex.

A notable jump in US dry whey output along with sizable stocks have prices moving lower.

Lactose and permeate prices are following dry whey and protein markets lower.

52 Days Number of days worth of US WPC 80 pro-

duction sitting in manufacturers’ storage in

June (5-year average is 38 days)

Proportion of EU SMP Intervention hold-

ings aged over twelve months

Market 2H '17 1H '18 2H '18

NZ WMP $1.39 $1.24 $1.31

US NDM $0.91 $1.00 $1.09

US Acid Casein $3.35 $3.35 $3.53

US WPC 80 $2.60 $2.53 $2.81

US WPC 34 $0.84 $0.85 $0.95

US Dry Whey $0.39 $0.37 $0.42

US Lactose $0.34 $0.33 $0.37

Blimling Price Forecasts ($ per lb)

90%

2

INGREDIENT digest

Global Trends

New Zealand

There is plenty of momentum going into

the 2017/2018 New Zealand production

season. Weather forecasts call for warm

spring temperatures and average rainfall.

Low slaughter rates also suggest plenty of

cow power. And, higher milk prices should

incent producers to milk early and often.

China

China milk production is reportedly down

year-over-year. Local producers are strug-

gling as they confront inexpensive powder

imports. June WMP imports jumped 57%

over 2016, while inbound shipments of

SMP rose 45%. Whey imports were also

elevated, up 25% from 2016.

Europe

EU milk production is struggling to return

to growth. May output was flat versus 2016

and early indications point to ongoing stag-

nation in June and July. Hot, dry weather

hit key supply centers like France and Ger-

many where milk flows are trailing prior

year.

United States

Producers continue to add cows, bringing

the US dairy herd to 9.4 million head in

June – the largest since 1996. June milk

output grew 1.6% year-over-year, while

first half production rose 2.0%. Healthy

farm margins should keep US supply

growing near 1.5% in the coming months.

3

INGREDIENT digest

The US dollar has weakened considerably in recent months due to uncertainty about

policy changes in Washington and the possibility of tighter monetary policy in Europe.

The Dow Jones Industrial Average reached 22,000 for the first time ever on August 2.

Crude oil prices are struggling to get back to $50. US stockpiles are trending lower, but

OPEC continues to expand despite an extended agreement to cut output.

Macro Influences

4

INGREDIENT digest

Skim Milk Powder

Excess supply continues to weigh down the SMP market. Fresh supply is easy to find, and, of course, there is the matter of 785 million pounds sitting in EU Interven-tion. US manufacturers’ stocks reached 297 million pounds in June – the largest volume for any month since mid-2009. And, there’s more supply on the way. High butterfat prices globally should push more milk toward SMP dryers in the months ahead – particularly in New Zealand.

Though export demand is solid globally, increased trade has yet to chew into the supply overhang. Consequently, any mate-rial price upside seems limited.

EU US NZ

2014 $1.61 $1.77 $1.68

2015 $0.91 $0.90 $0.98

2016 $0.89 $0.83 $0.90

$1.14 $1.17 $1.19

Q1 $0.96 $0.95 $1.09

Q2 $0.93 $0.87 $0.91

Q3 $0.90

Q4 $0.93

$0.91

Q1 $0.98

Q2 $1.03

Q3 $1.09

Q4 $1.09

$1.052018 Avg

NDM/SMP ($ per lb)

Period

3 Yr Avg

2017

2017 Avg

2018

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

2015 2016 2017 2018

NDM/SMP Prices

$ per lb; USDA Range EU US ForecastNZ

5

INGREDIENT digest

Whole Milk Powder

Oceania WMP prices continue to idle in the low to mid-$1.40s. In the early August GDT auction, prices increased 1.3% to $1.43 per pound ($3,155 per metric ton).

A wave of fresh supply is expected in the coming weeks as New Zealand milk pro-duction ramps up seasonally.

Global WMP demand is mixed. China WMP imports jumped to 93 million pounds in June—up nearly 60% from 2016 levels. Through June, inbound shipments were up 1%. Middle East imports year-to-date through May, however, dropped 17% on account of soft Saudi Arabia and Oman demand.

EU US NZ

2014 $1.86 $1.97 $1.69

2015 $1.16 $1.30 $1.11

2016 $1.14 $1.30 $1.10

$1.39 $1.53 $1.30

Q1 $1.46 $1.49 $1.45

Q2 $1.44 $1.41 $1.42

Q3 $1.44

Q4 $1.34

$1.41

Q1 $1.23

Q2 $1.25

Q3 $1.31

Q4 $1.32

$1.28

2018

2018 Avg

2017 Avg

WMP Forecast ($ per lb)

Period

3 Yr Avg

2017

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60

2015 2016 2017 2018

WMP Prices

$ per lb; USDA Range EU NZ ForecastUS

6

INGREDIENT digest

Acid Casein

World prices continue to fetch a hefty pre-mium to SMP-derived valuations. Con-tacts report supplies are still snug given reduced capacity over the past year.

Sluggish global trade may be helping to offset some of the supply tightness. June exports out of New Zealand fell 10% ver-sus last year and were down 15% for the first half. Meanwhile, US casein imports were flat compared to 2016.

Given higher prices relative to SMP, better relative returns may spur additional out-put in key supply centers like Ireland and New Zealand. More supply could knock down prices later in the year.

High Low Forecast

2014 $5.04

2015 $3.53

2016 $2.91

$3.83

Q1 $3.25

Q2 $3.57

Q3 $3.60 $3.25 $3.45

Q4 $3.55 $3.05 $3.25

$3.47 $3.18 $3.38

Q1 $3.60 $3.05 $3.30

Q2 $3.70 $3.15 $3.40

Q3 $3.85 $3.20 $3.45

Q4 $4.00 $3.25 $3.60

$3.79 $3.16 $3.442018 Avg

2017 Avg

2017

Period

3 Yr Avg

2018

Acid Casein Forecast ($ per lb)

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

2015 2016 2017 2018

Acid Casein Prices

$ per lb; USDA, Blimling Estimates Range Forecast

Month YoY % YTD YoY %

US Imports (Jun) 11 0% 47 (5%)

NZ Exports (Jun) 10 (10%) 45 (15%)

EU Exports (May) 9 34% 30 2%

* Trade data from tariff code 35011090

Key Casein Fundamentals (million pounds)

7

INGREDIENT digest

WPC 80

WPC 80 prices represent an estimated weighted aver-

age between contract and spot price levels

High Low Forecast

2014 $4.35

2015 $2.56

2016 $2.10

$3.00

Q1 $2.85

Q2 $3.05

Q3 $2.80 $2.40 $2.65

Q4 $2.75 $2.30 $2.55

$2.80 $2.52 $2.78

Q1 $2.70 $2.30 $2.45

Q2 $2.90 $2.35 $2.60

Q3 $3.05 $2.40 $2.75

Q4 $3.10 $2.45 $2.88

$2.94 $2.38 $2.67

Period

WPC 80 Forecast ($ per lb)

2018 Avg

2018

2017 Avg

2017

3 Yr Avg

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

2015 2016 2017 2018

WPC 80 Prices

$ per lb; Blimling Estimates Range Forecast

The domestic WPC 80 market is looking for stability amidst falling prices. Sup-plies continue to mount in light of strong production and weak US demand. An over-supplied WPI market has also cast a bearish shadow on its sister product.

US output is showing no signs of slowing down. June production hit 25.4 million pounds, a 11% increase over last year. Inventories are rising too. Processors re-ported 44 million pounds in storage at the end of June – up 17% since March.

Whey protein trade activity is robust. June US exports grew 20% versus 2016. New Zealand displayed similar growth

with June export volumes jumping 27% year-on-year. Growth came from ship-ments into China, while volume into the US declined.

Domestic WPC 80 consumption has dropped off. Implied use fell approxi-mately 16% year-to-date through June.

In addition to its own supply-side pres-sures, the WPC 80 market is also feeling the weight of historically low WPI prices. Price spreads have fallen to $1 per pound or lower in some cases. The WPI market is navigating through its own overcapaci-ty problems – akin to what WPC 80 went through in 2015.

Jun YoY % YTD YoY %

US Output 25 11% 154 3%

US Stocks 44 11%

US Imports * 5 (19%) 21 (38%)

* Trade data from tariff code 350220 (WPC 80+)

Key WPC 80 Fundamentals (million pounds)

8

INGREDIENT digest

WPC 34

On the surface, the WPC 34 market ap-pears starved for supply given capacity re-ductions over the past year. But prices continue to drift lower, pressured by weakness across the whey complex.

US output is softening once again. June production came in at just 14.5 million pounds – a 4% drop from 2016. Stocks fared a little better with June storage at 25.4 million pounds, 2% higher than May.

WPC 34 prices still have room to move lower given weakness in the dry whey market. Values are expected to bottom out near year-end and gradually climb in 2018 alongside dry whey and NDM.

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

2015 2016 2017 2018

WPC 34 Prices

$ per lb; USDA Range Forecast

High Low Forecast

2014 $1.58

2015 $0.80

2016 $0.68

$1.02

Q1 $0.96

Q2 $0.92

Q3 $0.90 $0.82 $0.87

Q4 $0.88 $0.76 $0.81

$0.91 $0.85 $0.89

Q1 $0.91 $0.75 $0.82

Q2 $0.98 $0.76 $0.88

Q3 $1.04 $0.79 $0.94

Q4 $1.08 $0.85 $0.97

$1.00 $0.79 $0.90

Period

WPC 34 Forecast ($ per lb)

2018 Avg

2018

2017 Avg

2017

3 Yr Avg

Jun YoY % YTD YoY %

US Output 15 (4%) 91 (1%)

US Stocks 25 0%

US Exports * 22 (36%) 148 (0%)

* Trade data from tariff code 404100500

Key WPC 34 Fundamentals (million pounds)

9

INGREDIENT digest

Sweet Dry Whey

Dry whey market fundamentals are weak. Supply is widely available, particularly in the US. Given the bearish supply back-drop, US and EU prices are trending lower.

US output is running strong with June vol-ume up 10% year-over-year. Meanwhile, June stocks increased 12% from last year.

Although US exports are robust – largely driven by growth in China, domestic con-sumption remains weak.

Production is expected to remain elevated as weak protein / carbohydrate margins force some processors into making more dry whey. Sustained output gains should keep pressure on prices through year-end.

High Low Forecast

2014 $0.66

2015 $0.42

2016 $0.29

$0.45

Q1 $0.49

Q2 $0.51

Q3 $0.44 $0.39 $0.43

Q4 $0.42 $0.32 $0.36

$0.45 $0.40 $0.45

Q1 $0.42 $0.31 $0.36

Q2 $0.45 $0.32 $0.38

Q3 $0.47 $0.36 $0.40

Q4 $0.50 $0.39 $0.43

$0.46 $0.34 $0.39

Period

Dry Whey ($ per lb)

2018 Avg

2018

2017 Avg

2017

3 Yr Avg

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

$0.60

2015 2016 2017 2018

Sweet Dry Whey Prices

$ per lb; USDA Range Europe Forecast

Jun YoY % YTD YoY %

US Production 88 10% 502 4%

US Stocks 82 12%

US Exports * 39 5% 222 20%

* Trade data from tariff code 404104000

Key Whey Fundamentals (million pounds)

10

INGREDIENT digest

Lactose and Permeate

The lactose market is softening due to record high stockpiles and anemic export demand. Published prices have fallen into the mid $0.30s and industry contacts indi-cate spot deals are running even lower.

US lactose output continues to expand, in line with high proteins. Perhaps of greater significance, June stocks topped 136 mil-lion pounds – a new all-time high.

The permeate market is also experiencing downside pressure. Prices have dipped be-low $0.30 per pound in most cases—a lev-el not seen in almost a year. US exports are down as well, with June volumes fall-ing 1% versus a year ago.

High Low Forecast

2014 $0.53

2015 $0.22

2016 $0.28

$0.34

Q1 $0.38

Q2 $0.41

Q3 $0.39 $0.32 $0.36

Q4 $0.37 $0.29 $0.32

$0.38 $0.33 $0.36

Q1 $0.38 $0.28 $0.32

Q2 $0.39 $0.29 $0.34

Q3 $0.41 $0.31 $0.36

Q4 $0.43 $0.33 $0.39

$0.40 $0.30 $0.35

Period

Lactose Forecast ($ per lb)

2018 Avg

2018

2017 Avg

2017

3 Yr Avg

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

2015 2016 2017 2018

Lactose Prices

$ per lb; USDA, Blimling Estimates Range Forecast

Jun YoY % YTD YoY %

US Output 97 3% 562 3%

US Stocks 136 9%

US Exports * 66 (3%) 382 (1%)

* Trade data from tariff codes 170211 and 170219

Key Lactose Fundamentals (million pounds)