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INGREDIENT Volume 3 Number 2

April 2018

Still a tale of abundant farm milk

supplies. Growing output in the US and

EU continues to put a cloud over many

product markets. Although producers

are starting to feel the pinch of lower

margins, milk flows are forecast to keep

expanding for the balance of 2018.

Large product stockpiles continue to

weigh on several ingredient categories.

Shifting US trade policy between the US

and China is impacting grain markets

but dairy is “off the list” for now.

The skim complex is stuck in neutral.

Stocks are abundant and US / EU peak

milk flows may only add to the pile.

Commodity whey is on better footing.

Highly competitive US prices have

driven up exports in recent months.

WPC 80 and WPI markets are sluggish,

still hampered by oversupply. Demand

prospects are reportedly improving but

prices are generally unchanged.

Lactose prices are stable. Stocks are still

elevated but easing lower.

Market 1H '18 2H '18 FY '19

NZ WMP $1.40 $1.23 $1.17

US NDM $0.70 $0.77 $0.97

US Acid Casein $3.15 $3.11 $3.31

US WPC 80 $1.60 $1.70 $2.15

US WPC 34 $0.71 $0.71 $0.77

US Dry Whey $0.26 $0.29 $0.35

US Lactose $0.22 $0.24 $0.30

Blimling Price Forecast ($ per lb)

2

INGREDIENT digest

Global Trends

New Zealand

Weather problems hurt New Zealand’s

milk production season. Despite some

improvement, February output was still off

2% year-over-year, while season-to-date

was down 0.2%. Reported culling of 20,000

cows, as a means to control disease, could

slow regional supply growth towards the

end of the season.

Argentina

While an ongoing drought is plaguing Ar-

gentina crops, the country’s milk produc-

tion was still holding up through February.

Output increased 14% from January, and

firm pricing could help production stay

strong. Export growth has also been sup-

portive. For the year, WMP shipments rose

25% year-to-year.

Europe

EU milk output started the year strong,

growing 4% year-over-year in January.

First quarter growth may not be as good,

though, due to inclement winter

weather in early March. Lower commodity

prices are pulling farm prices lower, but

February payouts near €35 were still likely

above the breakeven for many.

United States

The US dairy herd hit a 22-year high in

February with 9.41 million head. Tight

farm margins and increased slaughter

rates (up 9% year-over-year) may slow

herd expansion. Based on current futures,

2018 MPP calculations point to a $7.50 per

hundredweight margin, the lowest since

2013.

3

INGREDIENT digest

Global equity markets have turned volatile: bouncing back from an early February sell-off,

but recently slumping again on escalating tensions around China and US trade. Dairy has

not been directly implicated in the first couple rounds of tariff announcements.

Tight freight markets are creating headaches and higher costs for many companies.

Strong demand, limited capacity, few drivers and new regulations pushed rates higher.

Macro Influences

4

INGREDIENT digest

Skim Milk Powder Supply remains plentiful with more than a

billion pounds of product in storage across the globe. Seasonally rising production won’t help matters much, as additional milk should keep US and EU dryers churning out more NDM and SMP in the coming months.

Demand may not be as good as China’s January import activity initially implied. China’s February imports sank after a hefty volume of imports to start the year, and March numbers aren’t looking much rosier. Mexico is still buying…for now. Imports in January topped 22,985 metric tons, up 19% year-over-year.

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

2015 2016 2017 2018 2019

NDM/SMP Prices

$ per lb; USDA Range EU US ForecastNZ

EU US NZ

2015 $0.91 $0.90 $0.98

2016 $0.89 $0.83 $0.90

2017 $0.91 $0.87 $0.93

$0.90 $0.87 $0.94

Q1 $0.76 $0.70 $0.85

Q2 $0.70

Q3 $0.74

Q4 $0.80

$0.73

Q1 $0.87

Q2 $0.97

Q3 $1.00

Q4 $1.03

$0.972019 Avg

NDM/SMP ($ per lb)

Period

3 Yr Avg

2018

2018 Avg

2019

Mo YoY % YTD YoY %

China Import (Feb) 40 (11%) 142 22%

US Mfg Stocks (Feb) 324 24%

Key Fundamentals

5

INGREDIENT digest

Whole Milk Powder WMP continues to bounce around the

mid-$1.40s, holding a significant premium to the oversupplied SMP market. Barring a sizable shift in supply, a more balanced WMP market should maintain its premiums versus SMP.

China demand was seasonally strong in January with a record 138,110 metric tons imported. Volume dropped back in February and early indications point to more of the same in March.

Shipments to the Middle East are stronger, with imports up 16% year-over-year in January. And that’s coming off strong end of the year numbers in 2017.

$0.70

$0.90

$1.10

$1.30

$1.50

$1.70

$1.90

2015 2016 2017 2018 2019

WMP Prices

$ per lb; USDA Range EU NZ ForecastUS

EU US NZ

2015 $1.16 $1.30 $1.11

2016 $1.14 $1.30 $1.10

2017 $1.51 $1.44 $1.40

$1.27 $1.35 $1.21

Q1 $1.42 $1.44 $1.40

Q2 $1.40

Q3 $1.29

Q4 $1.16

$1.32

Q1 $1.12

Q2 $1.15

Q3 $1.18

Q4 $1.21

$1.17

2019

2019 Avg

2018 Avg

WMP Forecast ($ per lb)

Period

3 Yr Avg

2018

6

INGREDIENT digest

Milk Proteins MPC markets are reportedly stable

despite recent supply shifts. February US output fell 39% versus 2017 and 25% on a year-to-date basis. Imports did little to shore up soft output with inbound ship-ments down 3% through February. Pricing remains in the $2.30 to $2.60 range – still low but at elevated NDM multiples.

Both casein and caseinate markets remain snug. Plants in the EU and Oceania are reportedly running strong, yet healthy demand is keeping a firm bid in the market. New Zealand exports (casein and caseinates) are up 9% year-to-date while shifting its focus from the US to Asia.

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

2015 2016 2017 2018 2019

Acid Casein Prices

$ per lb; USDA, Blimling Estimates Range Forecast

High Low Forecast

2015 $3.53

2016 $2.91

2017 $3.42

$3.29

Q1 $3.15

Q2 $3.15 $2.90 $3.15

Q3 $3.20 $2.85 $3.12

Q4 $3.35 $2.80 $3.10

$3.21 $2.93 $3.13

Q1 $3.45 $2.90 $3.15

Q2 $3.60 $2.95 $3.20

Q3 $3.80 $3.05 $3.40

Q4 $3.90 $3.15 $3.50

$3.69 $3.01 $3.312019 Avg

2018 Avg

2018

Period

3 Yr Avg

2019

Acid Casein Forecast ($ per lb)Feb YoY % YTD YoY %

US MPC Production 12 (39%) 27 (25%)

US Casein Imports * 5 (39%) 13 (33%)

* Trade data from tariff code 35011090

Key Fundamentals

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INGREDIENT digest

High Protein Whey

WPC 80 prices represent an estimated weighted

average between contract and spot price levels

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

2015 2016 2017 2018 2019

WPC 80 Prices

$ per lb; Blimling Estimates Range Forecast

It’s more of the same for the WPC 80 market, at least in the US. There’s still too much product relative to prevailing demand, leaving prices near historic lows. Domestic production spiked in February, rising 19% over prior year. February stocks remain elevated, but suppliers did manage to cut holdings by 8% month-to-month.

It’s a similar picture for WPI: supply remains a problem and prices are down. Logically enough, US suppliers continue to trim production with February output down 12% year-to-year. Ostensibly, some plants are exercising flexibility by

moving whey solids into products like WPC 80 and dry whey. But despite the cutbacks, warehouses still hold three months of output.

The demand situation for high protein whey seems to be improving some. Several contacts cite increased buy-side activity on forward contracts. US high protein exporters appear to be leverage its competitive pricing position. Exports rose 8% through February, with growth driven by China and Japan. US high protein imports, on the other hand, fell 31% for the year, led by a dramatic decline in New Zealand shipments.

High Low Forecast

2015 $2.56

2016 $2.10

2017 $2.65

$2.44

Q1 $1.60

Q2 $1.80 $1.30 $1.60

Q3 $1.90 $1.40 $1.65

Q4 $2.00 $1.55 $1.75

$1.83 $1.46 $1.65

Q1 $2.20 $1.60 $1.95

Q2 $2.50 $1.65 $2.10

Q3 $2.60 $1.75 $2.20

Q4 $2.75 $1.80 $2.35

$2.51 $1.70 $2.152019 Avg

2019

2017 Avg

2018

3 Yr Avg

Period

WPC 80 Forecast ($ per lb)Feb YoY % YTD YoY %

WPI Stocks 27 13%

High Pro US Demand 38 21% 69 11%

Key Fundamentals

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INGREDIENT digest

WPC 34/35 WPC 34 prices are drifting lower in the

face of growing inventories. In March, average prices dipped below $0.70 for the first time since August 2016. Prices are down 27% from prior year, yet values remain elevated on a dry whey basis.

US output is up slightly for the year while stocks have quietly grown since last sum-mer. Inventories are at its highest since April 2016. Demand is reportedly mixed. Flexible users are leveraging $0.70 nonfat to access WPC 34 in the low to mid $0.60s. Meanwhile, sustained demand strength from infant nutrition has report-edly kept a strong bid on premium grades.

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

2015 2016 2017 2018 2019

WPC 34 Prices

$ per lb; USDA Range Forecast

High Low Forecast

2015 $0.80

2016 $0.68

2017 $0.89

$0.79

Q1 $0.72

Q2 $0.65 $0.75 $0.71

Q3 $0.65 $0.77 $0.71

Q4 $0.65 $0.80 $0.72

$0.67 $0.76 $0.71

Q1 $0.66 $0.83 $0.72

Q2 $0.68 $0.87 $0.75

Q3 $0.70 $0.90 $0.78

Q4 $0.72 $0.93 $0.82

$0.69 $0.88 $0.772019 Avg

2019

2017 Avg

2018

3 Yr Avg

Period

WPC 34 Forecast ($ per lb)Feb YoY % YTD YoY %

US Production 13 (3%) 29 3%

US Mfg Stocks 26 17%

Key Fundamentals

9

INGREDIENT digest

Sweet Dry Whey Dry whey has found a degree of support in

the past month. US supplies are still in de-cent shape, but a sustained discount to the EU is driving a notable bump in exports.

US whey suppliers turned in another solid month in February, producing 15% more product compared to 2017. Local stock-piles dropped slightly from January but still remained 26% higher than a year ago.

Solid exports into Asia are providing price stability. February whey exports totaled 42 million pounds, up 28% from 2017. Much of the increase came from China, where prickly trade dynamics could disrupt this upward momentum.

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

$0.60

2015 2016 2017 2018 2019

Sweet Dry Whey Prices

$ per lb; USDA Range Europe Forecast

High Low Forecast

2015 $0.42

2016 $0.29

2017 $0.44

$0.38

Q1 $0.26

Q2 $0.28 $0.21 $0.25

Q3 $0.33 $0.22 $0.28

Q4 $0.37 $0.23 $0.30

$0.31 $0.23 $0.27

Q1 $0.41 $0.25 $0.31

Q2 $0.45 $0.27 $0.34

Q3 $0.47 $0.29 $0.36

Q4 $0.50 $0.31 $0.39

$0.46 $0.28 $0.352019 Avg

2019

2017 Avg

2018

3 Yr Avg

Period

Dry Whey ($ per lb)Feb YoY % YTD YoY %

US Production 89 15% 180 12%

US Exports 42 28% 87 29%

* Trade data from tariff code 404104000

Key Fundamentals

10

INGREDIENT digest

Lactose and Permeate The lactose market is holding steady. Out-

put continues expand modestly, presuma-bly in part to sustained growth in WPC 80 production. However, stocks are falling from strong exports, keeping inventories more balanced. February year-to-date ex-ports jumped 17% over 2017, driven large-ly by a 61% spike in shipments to China.

Permeate is a mixed bag. Supplies are reportedly healthy. Contacts report good export prospects with prices in line with lactose. Trade data, however, points to lower shipments the first couple months of 2018. Domestic feed demand is slug-gish with prices below $0.20 per pound.

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

2015 2016 2017 2018 2019

Lactose Prices

$ per lb; USDA, Blimling Estimates Range Forecast

High Low Forecast

2015 $0.22

2016 $0.28

2017 $0.34

$0.28

Q1 $0.22

Q2 $0.23 $0.18 $0.22

Q3 $0.26 $0.18 $0.23

Q4 $0.28 $0.20 $0.25

$0.25 $0.19 $0.23

Q1 $0.30 $0.21 $0.26

Q2 $0.34 $0.22 $0.29

Q3 $0.36 $0.24 $0.32

Q4 $0.38 $0.26 $0.33

$0.34 $0.23 $0.302019 Avg

2019

2018 Avg

2018

3 Yr Avg

Period

Lactose Forecast ($ per lb)Feb YoY % YTD YoY %

US Mfg Stocks 117 4%

US Exports * 74 27% 142 17%

* Trade data from tariff codes 170211 and 170219

Key Fundamentals