AND R E P O R T. July 20, 2012 Volume 16 Number 28

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1 DAIRY AND GRAIN R E P O R T Volume 1 Number 28 Week Market 20-Jul 13-Jul -Jul 29-Jun 22-Jun 3% -20% Barrel Cheddar (CME average; lb) $ $ $ $ $ % -20% Block Cheddar (CME average; lb) $ $ $ $ $ % -22% Butter (CME average; lb) $ $ $ $ $ % -24% Nonfat Dry Milk (AMS Central AOM; lb) $ $ $ $ $ % -8% Dry Whey (AMS Central AOM; lb) $ $ $ $ $ % -28% WPC (AMS Central/West AOM; lb) $ $ $ $ $ % -22% Dry Buttermilk (AMS West AOM; lb) $ $ $ $ $ % -1% Class III Futures (CME 2nd nearby; cwt) $ 17.9 $ $ $ 1.87 $ 1. -1% -15% Cheese Futures (CME 2nd nearby; lb) $ $ $ $ $ % -21% Cash Butter Futures (CME 2nd nearby; lb) $ $ $ $ $ % -4% Dry Whey Futures (CME 2nd nearby; lb) $ $ $ $ $ % -18% NDM Futures (CME 2nd nearby; lb) $ $ $ $ $ % -20% Class IV Futures (CME 2nd nearby; cwt) $ $ $ $ $ % 19% Corn (CBOT nearby; bu) $ $ $ $.7250 $ % 27% Soybeans (CBOT nearby; bu) $ $ $ $ $ % 3% Wheat (CBOT nearby; bu) $ $ $ $ $ % 50% Soymeal (CBOT nearby; ton) $ $ $ $ $ % -4% Soyoil (CBOT nearby; lb) $ $ $ $ $ % -27% Cocoa (ICE nearby; ton) $ 2,232 $ 2,210 $ 2,245 $ 2,289 $ 2,094 5% -24% Sugar #11 (ICE nearby; lb) $ $ $ $ $ % -44% Orange Juice (ICE nearby; lb) $ $ $ $ $ % -23% Coffee (NYMEX; lb) $ 1.85 $ $ $ $ % -7% Lean Hogs (CME nearby; lb) $ $ $ $ 0.93 $ % 7% Live Cattle (CME nearby; lb) $ $ $ $ $ % -30% Natural Gas (NYMEX nearby; mmbtu) $ $ $ 2.77 $ $ % -8% Crude Oil (NYMEX nearby; bbl) $ $ $ $ 84.9 $ % -% Unleaded Gas (NYMEX nearby; gal) $ $ $ $ $ % -7% Heating Oil (NYMEX nearby, gal) $ $ $ $ 2.90 $ % 1% Dow Jones Industrials 12,823 12,777 12,72 12,880 12,41 1% 20% NASDAQ 100 2,925 2,908 2,925 2,935 2,892 0% 1% S&P 500 Index 1,33 1,357 1,350 1,32 1,335-1% -15% Euro/Dollar % -% Canadian Dollar/Dollar % -1% Gold $ 1,583 $ 1,592 $ 1,578 $ 1,04 $ 1,57 BLIMLING AND ASSOCIATES, INC 5201 EAST TERRACE DRIVE, SUITE 280 MADISON, WI INFO@BLIMLING.COM 2012 Blimling and Associates, Inc. This report is prepared for the exclusive use of Blimling and Associates clients. Reproduction 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.

2 Grains Reach All-Time Highs, Milk Production Slows T ensions continue to rise like temperatures across the Midwest. Grain prices reached record high levels and the Class III milk futures market struggled to keep up. Dairy producers are fearful about what high grain prices and, for some, constricted access to feed might mean for ongoing operations. Some contacts speak of betterthan-otherwise-expected near-term milk flow due to numerous freshening heifers in the Upper Midwest. But the June milk production report showed fewer cows and slow overall output growth. End-users are fretting, wondering about how this all fits together for commodity costs, margins and demand. Meanwhile, there is still a sense in many quarters that, at least for now, dairy products are available both in the US and abroad. Indeed, GlobalDairy- Trade auction prices were mixed, with a lower price for cheese raising the specter of reduced need for US product in the world and lower WMP prices engendering thoughts about more SMP/AMF production (and export potential) out of Oceania in the months ahead. Media attention is cresting, with the prospective dairy and food cost situation on the front pages of USA Today and other publications. In short, things have moved from very interesting to extraordinary and it is not even August % % 2% TOTAL CHEESE STOCKS Million Pounds Source: USDA/NASS FOOD/DRINKING PLACE SALES year-over-year change source: US Census Bureau -2% COMPARED TO GRAINS AND 2013 CLASS III FUTURES, the spot cheddar cheese market was comparatively calm. Block prices settled at $ per pound (+$0.0275) with barrels at $1.950 (+$0.0150). Chatter of tighter barrels seems to have quieted some six lots changed hands versus two block trades. Still, with nearby futures pricing cheese near $1.80 per pound, buyers may rebuke traces of sell-side pressure. The current spot market pressure appears related more to longer-term milk supply concerns as a function of grain prices, rather than here-andnow cheese market fundamentals. Supplies are reported as adequate with export prospects likely in peril given current international pricing. While Oceania prices remain slightly below the US at $1.3 per pound according to AMS, GlobalDairyTrade auction values imply a much steeper discount. With the September GDT contract at an average of $2,885 per metric ton ($1.31 per pound), the price wedge may be too much to overcome. At least for now however, strong exports have helped THE TAKEWAY (1) Grain and Class III milk futures higher, but spot prices little-changed in response. (2) Milk production up slightly in June, but off record-setting pace. (3) Inventories on June 30 neutral-to-bearish for cheese, bullish for butter. (4) Butter spot and futures prices rise, NDM futures bounce higher as well. (5) Corn and soybean futures prices set record highs, weather remains a concern. 2

3 keep inventories in check, to a degree. According to the USDA Cold Storage report, June American-type cheddar stocks increased to 29.9 million pounds, the 9.9 million pound monthover-month increase nearly doubling the historical average. Not even a bump in retail sales could halt the increase. According to persons familiar with retail scanner data, cheese sales for the four weeks ending July 7 were up more than 1% yearover-year, due at least partially to lower prices. According to the Bureau of Labor Statistics, natural cheddar cheese prices averaged $5.48 per pound in June, down 2% from May and the lowest level of the year. The US Department of Commerce reported that June food and drinking place sales stalled for the second consecutive month, up by.3% year-over-year, the smallest gain since August WHILE NEARBY CLASS III MILK FUTURES TRADED SIDEWAYS for most of the week, 2013 contracts continue to price in the fear over feed costs. The fourth quarter 2012 average gained $0.40 to close at $19.03 per hundredweight, in large part due to heavy Friday gains. Contracts with 2013 expirations shot higher the first half average jumped to $18.43 per hundredweight (+$0.5), with each contract pricing cheese at $1.82 per pound or higher. Second half contracts experienced the heaviest gains the average firmed to $18.20 per hundredweight (+$0.73). ACCORDING TO THE USDA MILK PRODUCTION REPORT, output in June totaled 1.70 billion pounds, up just 0.9%, the lightest year-over-year gain since July On a daily basis, production totaled million pounds, off 2.1% from May and the lowest since January. States such as Arizona, California and Texas suffered even worse output declines. While the early stages of the current heat wave may have reduced milk flow to a degree late in the month, production was still the most for June on record. On a more pressing note, the dairy herd declined for the second consecutive month to million head, off 19,000 head from May and 30,000 head from April. The last time the herd decreased for two consecutive months was in 2009, which was in fact, the last time production fell on a year-over-year basis. Slaughter activity has outpaced 2011 by nearly 3% through early July, with the heaviest cow number reductions in the West. THE BUTTER MARKET CONTINUES TO PRESS UPWARD, goosed along by the seasonal forces of declining milk flow and/ or component levels. Spot prices methodically tacked on another four cents to $ per pound, the highest level since mid-january. Just a single lot changed hands all week. Following the spot lead, the fourth quarter futures average gained COWS: ANNUAL CHANGE 150 thousand head (50) (100) (150) (200) (250) (300) MILK PRODUCTION CHANGE 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% CLASS III MILK "PACKS" $19.25 $18.75 $18.25 $17.75 $17.25 $1.75 $1.25 $15.75 $15.25 May 1 Jul 20 Oct-Dec 2012 Jan-Mar

4 BUTTER: MONTH-END STOCKS (NASS) 300 Million Pounds OCT-DEC 12 BUTTER FUTURES $1.70 $1.5 $1.0 $1.55 $1.50 $1.45 May 30 Jul 20 OCT-DEC 2012 NDM FUTURES $1.38 $1.3 $1.34 $1.32 $1.30 $1.28 $1.2 $1.24 $1.22 $1.20 Mar Apr May Jun Jul $ to $1.83 per pound. Cream multiples remain firm -- AMS figures implying 140, steady with last week and up from 135 last year. As "here-and-now" summer conditions fuel current markets, market observers continue to wonder about stamina in the months ahead. The recent Cold Storage report revealed a solid drawdown in what have been burdensome stock levels all year. Inventories stood at million pounds at the end of June, 28% or 52.4 million pounds heavier yearover-year. Stocks were pulled down by 18.9 million pounds from May to June versus an average increase of 3.5 million the past five years. Still, lackluster international markets suggest worldwide butterfat supplies are far from short. According to AMS, European prices fell by $0.09 to an average of $1.48 per pound, while Oceania prices held steady at a meager $1.30. The GlobalDairyTrade auction pegs butterfat prices at even softer levels with anhydrous milkfat values averaging $2,845 per metric ton ($1.04 per pound in 80% butter-equivalent terms). The sharp discounts portend the US could have a tough time competing in the export arena. Despite the headwinds, CWT continues its efforts announcing assistance on a combined 10.0 million pounds of cheese and butter, bringing the respective year-to-date totals to. million pounds of cheese and 54.8 million pounds of butter and AMF. THE ORIGIN IS KEY FOR NONFAT DRY MILK, with US prices rising as international values falter. According to Dairy Market News, spot prices in the Central States perked to an average of $ per pound (+$0.0425), the highest level since late March. The Western average gained $ to $ per pound. As spot markets firmed, survey prices moderated some, presumably with more discounted sales included. The CWAP retreated to $1.140 per pound (-$0.0395) for the week ending July 13, on nearly 9 million pounds, almost double the volume from the week prior. The NPDSR followed suit, falling slightly to $ per pound (-$0.0033). While domestic indices have rebounded to a degree, international prices sit on shaky ground. According to AMS, European SMP prices tumbled to $1.21 per pound (-$0.05) with WMP prices at $1.39 (-$0.05). Oceania SMP and WMP prices both averaged $1.27 per pound, off $0.03 and $0.04, respectively. That aligns with GlobalDairy- Trade results where WMP prices fell by more than % to $2,584 per metric ton ($1.17 per pound), while SMP prices reversed two consecutive losses to average $2,727 ($1.24). With SMP now higher than WMP, manufacturers may be incented to ramp up butter/powder production. Any such product shift out of New Zealand could compromise US export prospects later this year. 4

5 THE DRY WHEY MARKET HIT THE PAUSE BUTTON this week. Nearby futures contracts increased marginally to $ per pound (+$0.0022). Spot prices firmed some, but remain at a sharp discount. According to the NDPSR, dry whey prices for the week ending July 14 averaged $ per pound (+$0.003). Given that whey prices have followed Class III milk futures gains, lower international prints may hamper export opportunities. Still, according to AMS, prices in the West averaged $ per pound versus European prices at $0.5200, suggesting that unlike in other markets, whey shipments overseas may continue at a strong clip. Prices in the Central States held firm at $ per pound. AUGUST BASE FLUID MILK PRICES in the Federal Order System will continue to firm. The mover was announced at $1.55 per hundredweight, up.7% or $1.04) from July. NEARBY CORN FUTURES SURPASSED THE PREVIOUS RECORD high of $ per bushel set last July, with the September contract reaching a high of $ Reports of crop deterioration and yield reductions file daily, as the worst drought since the Dust Bowl grips the Midwest, with seemingly no relief in sight. Chatter around the market suggests a 130 bushel corn yield, already sharply lower than the recent USDA projection, with some estimates implying an even smaller number. Weather forecasts for the western part of the corn bell call for continued scorching heat, with little to no rainfall on the radar. The December 2012 corn futures contract closed at $ per bushel, up $0.575 for the week. Not to be outdone, the nearby soybean futures contract also set a new all-time high, crossing the $17.00 per bushel mark. Unlike for corn, the soybean crop can benefit from rainfall late in the season. Even so, with few forecasts calling for an abundance of showers and supplies remaining tight, soybeans may continue to press on the upper limit. November 2012 soybean futures settled at $1.825 per bushel, a $ gain for the week. ENDQUOTE: I think Greece is not going to exit until November. Things are not going to blow up until after November. Everybody is kicking the can down the road. We are kicking the can down the road on our fiscal issues. China is kicking the can down the road on their own structural issues because of a changing leadership. The Europeans want to avoid pulling the plug on Greece until maybe next year. We are not going to have a war with Iran until after the election...next year is the time where the can becomes too big to kick it down, and it hits a big, thick brick wall, and then we have a global perfect storm. -- Nouriel Roubini CLASS I MOVER $23 $21 $19 $17 $15 $13 $11 $ CBOT CORN FUTURES $8.50 $8.00 $7.50 $7.00 $.50 $.00 $5.50 $5.00 Mar 9 Jul 20 CBOT SOYBEAN FUTURES $18.00 $17.00 $1.00 $15.00 $14.00 $13.00 Mar 15 Jul 20 5

6 PRICE AND VOLUME DATA Week Week Ending 14-Jul 7-Jul 0% -23% NASS Block Cheddar (lb) $ $ % -20% NASS Barrel Cheddar (lb) $ $ % -24% USDA/NASS Butter (lb) $ $ % -30% USDA/NASS NDM (lb) $ $ % -10% USDA/NASS Dry Whey (lb) $ $ % 0% NASS Block Cheese Sales (mil lbs) % 21% NASS Barrel Cheese Sales (mil lbs) % -7% NASS NDM Sales (mil lbs) Week Week Ending 20-Jul 13-Jul 2% -20% Class III Futures Volume 7,127,979 % -34% Class III Futures Open Interest 24,88 23,429 28% -8% Cash Butter Futures Volume % 4% Cash Butter Futures Open Interest 4,24 4,195-43% -48% Nonfat Dry Milk Futures Volume % -7% Nonfat Dry Milk Futures Open Interest 1,740 1,727 29% 4% Dry Whey Futures Volume % 9% Dry Whey Futures Open Interest 1,72 1,99 CME CASH CHEESE AND BUTTER MARKETS BLOCK CHEDDAR 1-Jul 17-Jul 18-Jul 19-Jul 20-Jul Total High Trade $ $ - $ $ - $ - $ - Low Trade $ $ - $ $ - $ - $ - Settle $ $ $ $ $ $ Volume Unfilled Bids Uncovered Offers BARREL CHEDDAR 1-Jul 17-Jul 18-Jul 19-Jul 20-Jul Total High Trade $ - $ $ $ $ $ - Low Trade $ - $ $ $ $ $ - Settle $ $ $ $ $ $ Volume Unfilled Bids Uncovered Offers GRADE AA BUTTER 1-Jul 17-Jul 18-Jul 19-Jul 20-Jul Total High Trade $ - $ $ - $ - $ - $ - Low Trade $ - $ $ - $ - $ - $ - Settle $ $ $ $ $ $ Volume Unfilled Bids Uncovered Offers SMP/NDM USA EU AU/NZ in US Dollars $ 2,77-24% 4% $ 2,2-19% -4% $ 2,800-2% -3% in Euros 2,274-11% 3% 2,188-5% -3% 2,301-13% -2% BUTTER USA 3 EUROPE 2 AU/NZ in US Dollars $ 3,479-22% 3% $ 3,23-45% -7% $ 2,850-39% 0% in Euros 2,859-9% 4% 2,81-35% -% 2,342-28% 1% WHEY USA 1 EUROPE 2 in US Dollars $ 1,080-8% 3% $ 1,150-2% -3% in Euros 888 8% 4% % -2% CHEDDAR CHEESE USA 3 WORLD MARKET MATRIX AU/NZ in US Dollars $ 3,783-20% 5% $ 3,00-20% 0% in Euros 3,109-5% % 2,958-5% 1%