By Matt Gould, Chief Market Analyst. October 1, 2018

By Matt Gould, Chief Market Analyst October 1, 2018

2 Road Map Forecast Outlook Dairy Product Demand Analysis Nonfat Dry Milk Butter Cheese Dry Whey Global Supply & Demand Milk Supply Analysis Global USA Milk Powder Butter Cheese Whey Milk-equivalent Milkfat Not-fat solids

3 GLOBAL SUPPLY & DEMAND BALANCE

4 Summary This month s revision to milk price forecasts were mixed: Class III is estimated to average $15.15 per hundredweight in 2018 (down $0.12 from the previous forecast) and $16.16 in 2019 (down $0.04). Class IV is forecast at $14.28 in 2018 (up $0.05) and $15.22 in 2019 (unchanged). Rising global trade, especially for non-fat milk solids, is expected to support dairy markets worldwide. This growth will allow milk powder inventories to be drawn lower throughout 2019 and will offer the European Commission an opportunity to unload nearly all of its milk powder stocks. Strong increases in domestic demand in Europe and the USA will prevent inventories of butter and cheese from becoming burdensome. As forecast, 2019 is set to look similar to 2017 when Class III prices averaged $16.17/cwt and Class IV, $15.16/cwt. After a year filled with trade headwinds, the Trump Administration is pivoting and 2019 is on pace to be a much more trade-friendly year. Late last night we received news of a new NAFTA. Last week, a modestly revised trade agreement with South Korea was announced which will take effect 01 Jan19 and also last week, the start of trade negotiations with Japan, the 3 rd largest economy.

5 Supply and demand of milk-equivalent will cause inventories to fall 145 Billion lbs of Milk Equivalent 140 135 130 125 Robust imports of nonfat milk solids and strong growth in domestic consumption of milkfat Is forecast to support prices throughout 2019. This will allow inventories to decrease globally including the European Commission s stocks of skim milk powder which are on track to be offloaded by 1Q 2020. 120 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 Milk-Equivalent Available for Export Milk-Equivalent Imported Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

6 Million lbs of Milkfat The milkfat market is in the process of normalizing 4,200 4,100 4,000 3,900 3,800 3,700 3,600 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 High fat prices, caused by robust consumption growth in European and American markets, caused price-sensitive importers to slow purchasing over the last 18 months. These importers are expected to purchase quantities similar to the record highs in 2016 now that fat prices have decreased. Milkfat markets will remain supported in 2019, but at lower levels than in 2018. Milkfat Imported Milkfat Available for Export Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

7 Supply and demand of non-fat solids will result in lower inventories 14,000 Million lbs of Non-fat Milk Solids 13,500 13,000 12,500 12,000 11,500 11,000 10,500 Record trade of non-fat solids will support markets throughout 2019. Gains in imports are expected to outpace growth in supplies of non-fat milk solids. Rising imports in the Middle East, Southeast Asia, and oil-exporting nations will cause global inventories to fall throughout 2019. 10,000 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 Non-fat Solids Available for Export Nonfat Solids Imported Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

MILK SUPPLY 8

9 Growth in Global Milk Supply: Production of non-fat solids are forecast below trend Billion lbs of Non-fat Solids 56 54 52 50 48 R² = 0.9764 Growth in the supply of non-fat solids is forecast below trend. Higher values for milkfat are causing farmers in the USA to breed more color breeds into herds while environmental limitations will constrain growth in New Zealand, and parts of Europe. 46 Gains in productivity, not more cows, will power growth throughout 2019. 44 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat *Dotted line shows production increases have occurred at a consistent, linear pace. This is attributable to near-constant growth in output per cow globally.

10 Growth in Global Milk Supply: Production of milkfat is forecast modestly above trend Billion lbs of Milkfat 26 25 24 23 22 21 R² = 0.9854 Dairy farmers are making changes to produce the highervalue fat. In the first eight months of 2018, the supply of milkfat increased by 2.1% in the USA vs. milk production up 1.1%. Gains in milkfat per cow globally will cause fat production to rise faster-than-trend. 20 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat *Dotted line shows production increases have occurred at a consistent, linear pace. This is attributable to near-constant growth in output per cow globally.

11 USA milk production to be driven by gains in productivity per cow 4.50% YoY Change in USA Milk Production 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H - 2014 2015 2016 2017 2018 Gain from Milk Cows Gains From Productivity Total Gain Productivity per cow is driving milk production growth. Dairy farms are exiting in the Northeast, Southeast, and Midwest, but are expanding in the Southwest. This is keeping total cow numbers steady, but also is attracting government involvement in markets. Sources: USDA

GLOBAL & DOMESTIC DEMAND 12

13 Global Butter: Most-severe price levels are behind us as global market returns to surplus 1,900 Million lbs of Butter 1,800 1,700 1,600 1,500 1,400 1,300 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H Butter prices have already declined outside of the USA. In Europe, consumers are pushing back against high retail prices while in New Zealand, growth in milk supplies is pressuring prices. Meanwhile, pricesensitive buyers in the Middle East and Southeast Asia are increasing purchasing to take advantage of lower prices. 2014 2015 2016 2017 2018 2019 Butter Available for Export Butter Imported Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

14 USA Butter: Market nearly balanced MIllion lbs of Butter 250 200 150 100 USA butter markets are returning to a period of modest undersupply after exiting a period of modest oversupply. Domestic consumption of milkfat is rising. We continue to see and hear reports of robust retail and foodservice demand. 50 0 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 Inventories are adequate with 55 days in storage at the end of Aug vs. 65 days in Aug16 and 53 days in Aug17. Exports Surplus Available for Export Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

15 Global NFDM/SMP: Offloading of inventories keeps market adequately supplied 4,400 Million lbs of Milk Powder 4,200 4,000 3,800 3,600 3,400 3,200 The global market for milk powder is growing and is at record highs led by gains in the Middle East, other oilproducing regions, and Southeast Asia. Chinese purchasing has so far remained subdued but other regions have stepped up which is providing broad-based growth. 3,000 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 NFDM Available for Export NFDM Imported Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

16 USA NFDM: Exports supporting prices 1,650 1,550 Milk powder inventories are being drawn down due to growing export sales. Million lbs of NFDM/SMP 1,450 1,350 1,250 This is providing support to market prices and has a resulted in a notable change in sentiment with many contacts forecasting prices to surpass $1.00/lb in the near future. 1,150 1,050 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 The extreme bearish tone from earlier 1H18 is no longer present in our conversations. Exports Surplus available for Export Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

17 Global Cheese: A modest surplus 3,200 3,100 The global imported cheese market has remained nearly flat in size so far this year. Million lbs of Cheese 3,000 2,900 2,800 2,700 2,600 2,500 2,400 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 This is because growth in cheese imports by Asian nations were offset by declines in South America and Africa. Globally, the cheese market is forecast to remain in modest surplus which will prevent a surge in prices. Cheese Available for Export Cheese Imported Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

18 USA American Cheese: In surplus 260 240 220 The market for American cheese has remained oversupplied despite strong domestic demand growth. Million lbs of American Cheese 200 180 160 140 120 100 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2014 2015 2016 2017 2018 2019 Exports Surplus Available For Export Higher wages and robust consumer optimism is translating into extreme growth in foodservice sales and firm retail cheese sales. Late in 2019, the market for American cheese is forecast to become more balanced and the risk of high prices will increase. Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

19 USA Dry Whey: Returning to oversupply 600 Million lbs of Dry Whey 550 500 450 The USA is exiting a period of under-supply of dry whey which caused prices to rise to multi-year highs. In late 4Q18, new whey drying capacity will come online and in 1Q19, contracts with Chinese buyers will expire. 400 350 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2013 2014 2015 2016 2017 2018 2019 This will cause markets to return to oversupply in 1H19. Exports Surplus Available for Export Sources: USDA, ERS, DCANZ, DairyNZ, GTIS, Eurostat

PRICE FORECAST 20

21 Product and Class Price Forecast Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AVG Cheese 2016 $ 1.52 $ 1.52 $ 1.52 $ 1.50 $ 1.41 $ 1.45 $ 1.64 $ 1.81 $ 1.75 $ 1.58 $ 1.76 $ 1.80 $ 1.61 2017 $ 1.70 $ 1.69 $ 1.56 $ 1.50 $ 1.54 $ 1.63 $ 1.54 $ 1.67 $ 1.66 $ 1.73 $ 1.76 $ 1.65 $ 1.63 2018 $ 1.52 $ 1.47 $ 1.55 $ 1.57 $ 1.64 $ 1.62 $ 1.49 $ 1.55 $ 1.65 $ 1.71 $ 1.73 $ 1.66 $ 1.60 2019 $ 1.58 $ 1.63 $ 1.60 $ 1.61 $ 1.61 $ 1.60 $ 1.70 $ 1.70 $ 1.72 $ 1.72 $ 1.73 $ 1.70 $ 1.66 CME Barrel 2016 $ 1.48 $ 1.46 $ 1.45 $ 1.42 $ 1.35 $ 1.53 $ 1.74 $ 1.81 $ 1.54 $ 1.53 $ 1.74 $ 1.61 $ 1.56 2017 $ 1.56 $ 1.62 $ 1.41 $ 1.43 $ 1.48 $ 1.40 $ 1.44 $ 1.60 $ 1.57 $ 1.70 $ 1.67 $ 1.54 $ 1.53 2018 $ 1.33 $ 1.41 $ 1.51 $ 1.47 $ 1.59 $ 1.41 $ 1.37 $ 1.58 $ 1.45 $ 1.60 $ 1.60 $ 1.60 $ 1.49 2019 $ 1.50 $ 1.55 $ 1.50 $ 1.45 $ 1.47 $ 1.50 $ 1.55 $ 1.63 $ 1.65 $ 1.65 $ 1.66 $ 1.63 $ 1.56 CME Block 2016 $ 1.48 $ 1.47 $ 1.49 $ 1.42 $ 1.32 $ 1.50 $ 1.66 $ 1.78 $ 1.62 $ 1.60 $ 1.88 $ 1.73 $ 1.58 2017 $ 1.69 $ 1.62 $ 1.43 $ 1.50 $ 1.63 $ 1.60 $ 1.66 $ 1.69 $ 1.64 $ 1.73 $ 1.66 $ 1.49 $ 1.61 2018 $ 1.49 $ 1.52 $ 1.56 $ 1.61 $ 1.64 $ 1.56 $ 1.54 $ 1.63 $ 1.64 $ 1.72 $ 1.76 $ 1.62 $ 1.61 2019 $ 1.56 $ 1.61 $ 1.60 $ 1.67 $ 1.65 $ 1.60 $ 1.75 $ 1.67 $ 1.69 $ 1.69 $ 1.70 $ 1.67 $ 1.66 Dry Whey 2016 $ 0.24 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.26 $ 0.27 $ 0.28 $ 0.31 $ 0.33 $ 0.37 $ 0.40 $ 0.29 2017 $ 0.44 $ 0.49 $ 0.52 $ 0.52 $ 0.51 $ 0.49 $ 0.45 $ 0.43 $ 0.42 $ 0.38 $ 0.36 $ 0.30 $ 0.44 2018 $ 0.28 $ 0.25 $ 0.25 $ 0.26 $ 0.27 $ 0.31 $ 0.34 $ 0.37 $ 0.41 $ 0.43 $ 0.44 $ 0.44 $ 0.34 2019 $ 0.42 $ 0.40 $ 0.38 $ 0.38 $ 0.38 $ 0.39 $ 0.40 $ 0.42 $ 0.43 $ 0.44 $ 0.45 $ 0.46 $ 0.41 Butter 2016 $ 2.08 $ 2.14 $ 1.99 $ 2.02 $ 2.06 $ 2.16 $ 2.32 $ 2.23 $ 2.08 $ 1.86 $ 1.91 $ 2.10 $ 2.08 2017 $ 2.26 $ 2.18 $ 2.17 $ 2.12 $ 2.16 $ 2.41 $ 2.60 $ 2.66 $ 2.53 $ 2.37 $ 2.28 $ 2.23 $ 2.33 2018 $ 2.20 $ 2.11 $ 2.18 $ 2.25 $ 2.34 $ 2.38 $ 2.26 $ 2.32 $ 2.28 $ 2.36 $ 2.24 $ 2.20 $ 2.26 2019 $ 2.22 $ 2.20 $ 2.20 $ 2.20 $ 2.25 $ 2.22 $ 2.16 $ 2.16 $ 2.17 $ 2.10 $ 2.05 $ 2.13 $ 2.17 NFDM 2016 $ 0.78 $ 0.77 $ 0.75 $ 0.73 $ 0.76 $ 0.79 $ 0.84 $ 0.86 $ 0.88 $ 0.92 $ 0.91 $ 0.96 $ 0.83 2017 $ 1.02 $ 0.99 $ 0.85 $ 0.84 $ 0.87 $ 0.91 $ 0.90 $ 0.87 $ 0.85 $ 0.81 $ 0.76 $ 0.72 $ 0.87 2018 $ 0.70 $ 0.71 $ 0.70 $ 0.71 $ 0.79 $ 0.82 $ 0.78 $ 0.81 $ 0.85 $ 0.90 $ 0.91 $ 0.92 $ 0.80 2019 $ 0.93 $ 0.94 $ 0.95 $ 0.93 $ 0.91 $ 0.89 $ 0.92 $ 0.95 $ 0.98 $ 1.01 $ 1.01 $ 1.01 $ 0.95 Class III 2016 $ 13.72 $ 13.80 $ 13.74 $ 13.63 $ 12.76 $ 13.22 $ 15.24 $ 16.91 $ 16.39 $ 14.82 $ 16.76 $ 17.40 $ 14.87 2017 $ 16.77 $ 16.88 $ 15.81 $ 15.22 $ 15.57 $ 16.44 $ 15.45 $ 16.57 $ 16.36 $ 16.69 $ 16.88 $ 15.44 $ 16.17 2018 $ 14.00 $ 13.40 $ 14.22 $ 14.47 $ 15.18 $ 15.21 $ 14.10 $ 14.95 $ 16.08 $ 16.83 $ 17.04 $ 16.35 $ 15.15 2019 $ 15.47 $ 15.82 $ 15.41 $ 15.51 $ 15.53 $ 15.49 $ 16.48 $ 16.59 $ 16.85 $ 16.88 $ 17.01 $ 16.82 $ 16.16 Class IV 2016 $ 13.31 $ 13.49 $ 12.74 $ 12.68 $ 13.09 $ 13.77 $ 14.84 $ 14.65 $ 14.25 $ 13.66 $ 13.76 $ 14.97 $ 13.77 2017 $ 16.19 $ 15.59 $ 14.32 $ 14.01 $ 14.49 $ 15.89 $ 16.60 $ 16.61 $ 15.86 $ 14.85 $ 13.99 $ 13.51 $ 15.16 2018 $ 13.13 $ 12.87 $ 13.04 $ 13.48 $ 14.57 $ 14.91 $ 14.14 $ 14.63 $ 14.80 $ 15.53 $ 15.15 $ 15.06 $ 14.28 2019 $ 15.23 $ 15.24 $ 15.32 $ 15.15 $ 15.19 $ 14.92 $ 14.88 $ 15.15 $ 15.46 $ 15.40 $ 15.21 $ 15.54 $ 15.22

22 Nonfat Dry Milk Price Forecast $1.20 $1.15 $1.10 $1.05 Price of NFDM/SMP per lb $1.00 $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017 10/1/2017 11/1/2017 12/1/2017 1/1/2018 2/1/2018 3/1/2018 4/1/2018 5/1/2018 6/1/2018 7/1/2018 8/1/2018 9/1/2018 10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 7/1/2019 8/1/2019 9/1/2019 10/1/2019 11/1/2019 12/1/2019 Sources: USDA CME NFDM Oceania EU SMP Forecast: NASS NFDM

23 Butter Price Forecast $3.60 $3.40 $3.20 $3.00 $2.80 Price of Butter per lb $2.60 $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017 10/1/2017 11/1/2017 12/1/2017 1/1/2018 2/1/2018 3/1/2018 4/1/2018 5/1/2018 6/1/2018 7/1/2018 8/1/2018 9/1/2018 10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 7/1/2019 8/1/2019 9/1/2019 10/1/2019 11/1/2019 12/1/2019 Sources: USDA CME Oceania EU Forecast NASS Butter

24 Cheddar Cheese Price Forecast $2.00 $1.90 $1.80 $1.70 Price of Cheddar per lb $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017 10/1/2017 11/1/2017 12/1/2017 1/1/2018 2/1/2018 3/1/2018 4/1/2018 5/1/2018 6/1/2018 7/1/2018 8/1/2018 9/1/2018 10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 7/1/2019 8/1/2019 9/1/2019 10/1/2019 11/1/2019 12/1/2019 Sources: USDA CME Barrel Oceania Forecast NASS Cheese

25 Dry Whey Price Forecast $0.80 $0.75 $0.70 $0.65 Price of Dry Whey per lb $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 12/1/2016 1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017 10/1/2017 11/1/2017 12/1/2017 1/1/2018 2/1/2018 3/1/2018 4/1/2018 5/1/2018 6/1/2018 7/1/2018 8/1/2018 9/1/2018 10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 7/1/2019 8/1/2019 9/1/2019 10/1/2019 11/1/2019 12/1/2019 EU NDPSR Forecast NASS Dry Whey Sources: USDA

26 Disclosures FUTURES AND OPTIONS ON FUTURES TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION CONTAINED HEREIN IS STRICTLY THE OPINION OF ITS AUTHOR AND NOT THAT OF RICE DAIRY LLC AND IS INTENDED FOR INFORMATIONAL PURPOSES AND IS NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION TO BUY OR TRADE IN ANY COMMODITY OR SECURITY MENTIONED HEREIN. INFORMATION IS OBTAINED FROM SOURCES BELIEVED RELIABLE, BUT IS IN NO WAY GUARANTEED. OPINIONS, MARKET DATA AND RECOMMENDATIONS ARE SUBJECT TO CHANGE AT ANY TIME. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. RESEARCH ANALYST MAINTAINS POSITIONS IN THE COMMODITY CONTRACTS MENTIONED WITHIN THIS REPORT.