PERSPECTIVEFebruary 2019

The latest insights into global dairy markets

Your regular global overview of the dairy industry along with trends in milk production, commodity prices and dairy trade.

Welcome back to Perspective!February 2019

Welcome back to the first edition of Perspective for 2019 and Happy Chinese New Year to all our readers. May the year of the pig bring you happiness and good fortune.

At the beginning of every year the food and beverage industry is on the lookout for the latest insights with the aim of tapping into opportunities for new innovations and products. However, one of the challenges is navigating through the avalanche of information out there and finding the gold. NZMP’s Global Insights Manager, Roshena De Leon, and her team have done the heavy lifting and summarised the common themes and opportunities, presenting the top 5 trends for the Dairy industry in 2019 as this month’s feature article.

Click on any of the top 5 trends to read more; Digestive health, holistic wellness, the definitive snacking occasion, 360 ethics and adventurous consumption patterns.

Four key movements for the month:

1. Production – New Zealand production continues to exceed this time last year, although with a long dry summer to date, we are watching the next few months very closely. There is sustained stable growth in the US. EU growth is easing and production continues to decline in Australia.

2. Exports – Growth continues out of Australia and US. European and New Zealand exports are off to a good start in 2019 with volumes increasing following the decline reported in December.

3. Imports – Latin American imports are increasing, with Middle East and Africa imports on the decline. The import growth remains strong in China and wider Asia.

4. Prices – The latest GDT auction saw continued price increases across the board, except for BMP, resulting in the GDT price index up 6.7% to USD $3,265/MT. WMP prices increased 8.4%, which is a deviation to what we saw for most of 2018. SMP continues its rapid increase, having gained USD $500/MT over the last 5 events. Fat prices have also seen a healthy increase.

If you have any suggestions for topics you would like to read about in Perspective, or any other general feedback, we would love to hear from you. You can contact us at nzmpbrand@fonterra.com or through your account manager.

Kind regards,

Alex Turnbull Director, NZMP Marketing

In this issueFeature article 4

Global production 8

Fonterra milk collection 9

Global exports 10

Global imports 11

Tracking the global dairy market 12

Global indicators 13

Commodity prices 14

GDT results 15

Industry commentary 16

Glossary 18

3

FEATURE ARTICLE

Roshena De LeonGlobal Insights Manager, NZMP

Like tradition, every new year, the food and beverage industry is on the lookout for the biggest trends that will drive growth in the category. The aim is to tap into the opportunities brought on by changing global demographics, rapid urbanisation and rising wealth.

However, one of the challenges is trying to navigate through the many trends that are being reported each year, and find the gold. So, in this article, our insights team have summarised the common themes for 2019, drawing out key opportunities and trends. This makes going through this year’s trends a lot more interesting and a little less overwhelming – so, with that...

Here’s our top 5 trends for the Dairy industry in 2019:

1. Digestive health comes to the fore The concept of food as medicine and relying on the natural goodness of certain food ingredients continues, with digestive health taking much of the spotlight this year. New Nutrition Business and Mintel report that the scientific evidence highlighting the importance of the microbiome and how it can positively affect consumers overall health and wellbeing is making it more attractive to consumers.

Beyond the growth of digestive health claims, more interesting to watch out for this year is how the narrative around digestive health will evolve. We expect a progression from digestive comfort messaging to how holistic wellness starts from the gut. This would cover a wide range of benefits from weight management, to immunity, to beauty and brain health. Moreover, the interest that digestive health gets will also lead to different paths to making this claim. This will include highlighting ingredients like kombucha, probiotics, fibre, plant, or A2 dairy or processing like fermentation.

With the growing interest in digestive health, there will be plenty of opportunities to tap into this trend with new formats as well as a range of positioning stories.

The key to marketing success is having stories that strongly link to

recognisable benefits.

Roshena joined Fonterra in early 2015. As the Global Insight Manger for NZMP she is responsible for communicating an in-depth understanding of global markets and consumer trends, through strategic initiatives and opportunities. Roshena has a passion for telling the story behind the data and working with NZMP and their customers on which innovations and actions can bring these insights to life.

Roshena has 20 years of experience in both qualitative and quantitative research with a strong focus on the FMCG category.

Prior to Fonterra, Roshena has held roles in various global market research and media agencies and MNCs.

Top 5 trends for Dairy in 2019

NZMP PERSPECTIVE February 20194

2. Wellness goes beyond the physical More and more we will see a move towards consumers being mindful of their overall health. Mind, body and soul wellness will become a more common concept that consumers live by. This evolves the story of personalised health from physical to that of lifestyle based health. Be it cutting down on sugar intake, supporting sustainably sourced products, consuming more protein, or adopting a plant based diet -- the aim will not be simply to stay healthy but to be able to lead the lifestyle that one desires. This will be an important component of the narrative that the food and beverage industry tells consumers. Communicating and positioning products purely on demographics such as age and gender will increasingly be less relevant.

In line with this trend, we expect to see more collaboration opportunities between seemingly disconnected or independent categories – foods and gadgets, apparel and beverages, food keepers and formula, the list goes on.

There will also be more opportunities to cross sell and cross promote tied by a common goal of helping consumers achieve ‘total wellness’.

A build on this trend is that ‘self-care’ as a concept will also become more common. Euromonitor suggests “being able to ‘look after yourself’ is seen as a luxury that allows people to be more versatile and expand their possibilities. Dictating, designing and personalising your life allows you to be more flexible.” Companies will therefore need to find ways to enable this behaviour so as not to be cut out of the equation.

3. Snacking is its own occasion We are getting past the point of snacking being simply a means of satisfying hunger on-the-go through convenient formats. As we now see snacking become an established meal occasion in its own right - having a share of approx. 40% of food and beverage consumption in several markets based on our own research - the demand for the quality of food and beverages in snacking also evolves. This means changing priorities when making choices as snacking solutions become more accessible and common.

Consumers will desire to trade up, seek more added value out of their snacks and will be less compromising on quality.

Disclaimer: The views expressed above are general opinions only, and Fonterra is not responsible for any decisions taken in reliance on the same.

5

FEATURE ARTICLE

According to Innova, healthy snacking options are showing the fastest growth for new

product development in the last 5 years. Beyond healthy snacking, providing snacks that offer new sensory experience, are more premium and more natural, will benefit.

4. Ethics goes 360 Increasingly consumers will want to contribute to causes that benefit the environment and society as a whole. Consuming products that align with these values will be an easy way of actualising social responsibility hence companies that are doing good can certainly have the opportunity do well by adding this to their selling stories.

While consumer interest in ethical sourcing and sustainability continues, it will also evolve to extend throughout the whole supply chain.

We will be seeing an extension to the story of “grass to glass” as it becomes “grass to glass to

bin and beyond”.On top of purchasing socially and environmentally responsible products, consumers will more actively participate in this cause by being more mindful, not just of what they consume, but how they consume them. This pushes a more minimalist and less wasteful mindset as well as being more conscious of how they dispose of products afterwards. This offers opportunities for manufacturers to continue the conversation of social responsibility past the shopper aisle into the consumers’ homes by continuing the conversation post-consumption.

5. Adventurous consumption A survey by GlobalData indicated that 60% of consumers globally rank trying new experiences as the most exciting compared to trying new products. Indeed, the way many people consume food and beverages these days has evolved from simply trying to satisfy hunger or to hydrate. From ‘Instagramable’ food, to unique textures and food preparations we rave about on social media –

Eating has increasingly become a showcase of how we live (or aspire to live) - a symbolism of the experiences we are having rather than just

a showcase of what we are eating. New experiences as part of food and beverage consumption will remain and consumers will continue to want to push the boundaries. Consumers will place value on the authenticity of these experiences as they tire of generic products and place more emphasis on higher quality, unique and differentiated offerings.

The glocalisation of food that started years ago will be given a boost and we will see a lot more ethnic food being introduced. By this we don’t mean food from the east going to the west. The exchange will go both ways. Whereas in the past we talk about westernisation of diets, in the future we will see western foods becoming one of many “ethnic” food choices. More consumers will use food to experience new cultures without even leaving their homes.

Adding an element of surprise through packaging or at moment of consumption and activating the senses with hybrid flavours or smells or textures can all be strategies to tap into this trend.

NZMP PERSPECTIVE February 20196

Successfully tapping into these top trends is all about finding the right expressions that best align to the products’ positioning and brand identity._Being able to successfully weave several of these trends into one product story increases chances of success.

Equally, however, being able to consciously deselect trends that do not align with the product’s identity and values is just as critical in achieving success.

Disclaimer: The views expressed above are general opinions only, and Fonterra is not responsible for any decisions taken in reliance on the same.

7

Production in New Zealand up on last year. US production growth remains steady, EU growth is easing and Australia is declining.To view a summary of year-on-year changes in production click here

Data from Global Trade Information Services and from government and industry websites, including USDA, Eurostat, High Ground Dairy, Dairy Australia and Dairy

Companies Association of New Zealand

GLOBAL PRODUCTION

AUSTRALIA

+0%Production change for the 12 months to October 2018

Production for the 12 months to October is marginally ahead of the previous 12 months.

Drought, high input costs and increased cow cull rates, continue to severely impact milk production. Dairy Australia has forecast a milk production decline of 5% to 7% for the season.

Australian milk production decreased 6% in October compared to the same period last year.

EUROPEAN UNION

+1%Production change for the 12 months to November 2018

Production for the 12 months to November was up 1% compared to the same period last year. Growth has slowed but has remained steady since August.

EU milk production decreased 1% in November compared to the same period last year.

In November The Netherlands experienced the largest monthly decline and France and Germany also continued to decline. Stronger milk production continues in Ireland.

UNITED STATES

+1%Production change for the 12 months to November 2018

Milk production for the 12 months to November increased by 1% compared to the same period last year.

US milk production was up 1% in November compared to the same period last year. The US continues to see relatively steady production growth driven by increased yield per cow.

Margins continue to be squeezed with Class III milk below USD15.00 per hundredweight. The new Dairy Margin coverage programme may assist production on smaller farms but overall US growth is expected to continue at current levels which are below those observed over the past several years.

NEW ZEALAND

+2%Production change for the 12 months to December 2018

New Zealand milk production for the 12 months to December was 2% higher than last year.

Total New Zealand milk production increased 4% in December compared to the same month last year.

Favourable weather conditions supported peak collection with production returning to more usual production levels following two previous seasons that were impacted by weather.

NZMP PERSPECTIVE February 20198

FONTERRA MILK COLLECTION 2018/19 SEASON

2018/19

2017/18

2016/17

Fonterra Global Dairy Update, November 2018

FONTERRA MILK COLLECTION

AUSTRALIAN COLLECTION

-14%Decrease for the season from 1 July to 31 December

Fonterra’s milk collection across Australia for the six months to 31 December reached 72 million kgMS, down 14% on the same period last season.

Australia collections in December reached 13 million kgMS, down 18% on the same month last season.

High input costs and poor seasonal conditions continue, resulting in increased cow cull rates, decreasing the season’s milk production.

As national volumes decline, the milk supply market continues to be highly competitive.

NEW ZEALAND COLLECTION

+4%Increase for the season from 1 June to 31 December

Fonterra’s milk collection across New Zealand for the seven months to 31 December reached 914 million kgMS, up 4% on the same period last season.

New Zealand collections in December were 185 million kgMS, 5% up on the same month last season.

The mix of fine weather and rain in December saw soil moisture and pasture levels recover across most of the country.

Overall good animal health and favourable weather resulted in milk volumes ahead of last season, which was a three-year low where weather conditions and other factors had an adverse impact.

JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY

9

Data from Global Trade Information Services, US Dairy Export Council, EU Milk Market Observatory, Dairy Australia, High Ground Dairy and Eucolait

Exports from Australia and the US continue to grow. European and New Zealand exports increasedTo view a summary of year-on-year changes in exports click here

GLOBAL EXPORTS

AUSTRALIA

+6%Export change for the 12 months to November 2018

Exports for the 12 months to November were up 6%, or 41,000 MT, on the previous comparable period.

Fluid and fresh dairy, cheese, and infant formula continued to make up most of growth in Australian exports, up a combined 35,000 MT.

Australian dairy exports increased 13%, or 9,000 MT, in November compared to the same period last year. This growth was due to infant formula, fluid products, SMP and butter up a combined 10,000 MT. This was off-set by a decline in cheese of 1,500 MT.

EUROPEAN UNION

+1%Export change for the 12 months to October 2018

Exports for the 12 months to October were up 1%, or 73,000 MT, on the previous comparable period.

There was continued growth in a broad range of products, led by infant formula and SMP, offset by declines in fluid milk products and WMP.

EU dairy exports increased by 12%, or 53,000 MT, in October compared to the same period last year. This was primarily driven by SMP, fluid products, cheese, lactose and WPC, up a combined 53,000 MT.

UNITED STATES

+13%Export change for the 12 months to October 2018

Exports for the 12 months to October were up 13%, or 291,000 MT, on the previous comparable period.

The increase was across a broad range of products notably SMP, lactose, WPC and WMP, up a combined 231,000 MT.

US dairy exports increased by 3%, or 5,000 MT, in October compared to the same period last year. Growth in SMP, WMP and AMF of a combined 15,000 MT, was the primary driver behind this increase.

NEW ZEALAND

+1%Export change for the 12 months to November 2018

Exports for the 12 months to November were up 1%, or 43,000 MT, on the previous comparable period. This was driven by fluid products, WMP, infant formula, AMF and butter, up a combined 114,000 MT. This was off-set by declines in SMP, cheese and cultured products down a combined 61,000 MT.

Total New Zealand dairy exports increased by 13%, or 40,000 MT, in November compared to the same period last year. This was primarily driven by WMP, up 27,000 MT. Fluid products, AMF, SMP, MPC and infant formula were up a combined 22,000 MT. Butter declined 9,000 MT.

NZMP PERSPECTIVE February 201910

Imports into Asia and China showed strong growth. Latin America increased but Middle East and Africa downTo view a summary of year-on-year changes in imports click here

GLOBAL IMPORTS

LATIN AMERICA

+1%Import change for the 12 months to October 2018

Imports for the 12 months to October were up 1%, or 19,000 MT, compared to the same period the previous year.

Latin American dairy import volumes¹ increased 16%, or 24,000 MT, in October compared to the same period last year. This increase was primarily driven by WMP, SMP, cheese and fluid products up a combined 20,000 MT. All other product categories were also up.

ASIA

+5%Import change for the 12 months to October 2018

Imports for the 12 months to October were up 5%, or 208,000 MT, compared to the same period the previous year. This growth was driven by fluid products, WMP and cheese of 180,000 MT.

Asia (excluding China) dairy import volumes¹ increased 14%, or 51,000 MT, in October compared to the same period last year. Growth was across a broad range of products off-set by small declines in butter, whey and other powders.

CHINA

+7%Import change for the 12 months to November 2018

Imports for the 12 months to November were up 7%, or 255,000 MT, compared to the same period last year. Strong demand out of China continued with imports across all key categories, except cheese, up for the period.

China dairy import volumes increased 8%, or 20,000 MT, in November compared to the same period last year. This was driven by increases across a broad range of products, off-set by small declines in infant formula and whey powder.

RUSSIA

-8%Import change for the 12 months to November 2018

Imports for the 12 months to November 2018 were down 8% or 98,000 MT compared to the same period the previous year. This was mainly driven by Fluid and fresh dairy, Whey Powder, SMP and WMP being down a combined 193,000 MT.

Russia import volumes were up 8% or 7000 MT for November 2018 compared to the same month last year. This was primarily led by Cheese, SMP and Butter tracking up a combined 28,000 MT.

MIDDLE EAST & AFRICA

-6%Import change for the 12 months to October 2018

Imports for the 12 months to October were down 6%, or 237,000 MT, compared to the same period the previous year. The reduction was driven by fluid and fresh dairy and cheese, down a combined 239,000 MT. This was off-set by a small increase in SMP.

Middle East and Africa dairy import volumes¹ decreased 6% or 19,000 MT in October compared to the same period last year. Small growth in SMP and WMP products was offset by declines in most other product categories totalling 25,000 MT.

1 Estimates are included for those countries that have not reported import data.2 China has suspended trade data, citing system technical issues. Based on exports to China, we estimate June volumes grew 15% compared to the previous comparable period.Sources: Data from Global Trade Information Services; EU Milk Market Observatory; FAO; Highground Trading Group

11

Global Dairy MarketThe charts on the right illustrate the year-on-year changes in imports, exports and production for a range of countries that are important players in global dairy trade.

The absolute size of the bars represents the change in imports, exports or production, relative to the same period the previous year.

Averages are shown where data is complete for the regions presented.

For further information click here

PRODUCTION

EXPORTS

IMPORTS

TRACKING THE GLOBAL DAIRY MARKET

Government milk production statistics/GTIS trade data/Fonterra analysis

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NEW ZEALAND EU27 UNITED STATES AUSTRALIA AVERAGE

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NEW ZEALAND EU27 UNITED STATES AUSTRALIA AVERAGE

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JUN ‘18 JUL ‘18 AUG ‘18 SEP ‘18 OCT ‘18 NOV ‘18DEC ‘17 JAN ‘18 FEB ‘18 MAR ‘18 APR ‘18 MAY ‘18

ASIA CHINA MIDDLE EAST & AFRICA LATIN AMERICA RUSSIA AVERAGE

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JUN ‘18 JUL ‘18 AUG ‘18 SEP ‘18 OCT ‘18 NOV ‘18DEC ‘17 JAN ‘18 FEB ‘18 MAR ‘18 APR ‘18 MAY ‘18

NZMP PERSPECTIVE February 201912

WeatherSeveral key dairy farming regions in New Zealand are experiencing an official heatwave over summer, with NIWA reporting record breaking temperatures in late January 2019. This may impact the upcoming milk production.

In the US, the dryer-than-normal conditions persisted in the West. This contributed to the devastating wildfire outbreak in California. In the far east, the cold air settled in during November which impacted fieldwork, causing significant delays in harvest for the cotton sector – which advanced at the slowest pace in the last quarter century.

World Agricultural Weather Highlights USDA oCOE; https://www.niwa.co.nz/news/the-heatwave-in-numbers

EconomicComposite leading indicators (CLIs) continue to point towards easing growth momentum in the most major economies.

The early signs of easing growth momentum in the USA and Germany displayed in December 2018 have been confirmed in January 2019. Easing growth momentum also remains the assessment for the United Kingdom, Canada, Brazil, Russia and the wider euro area (including Italy and France).

Japan and the industrial sectors of China and India all present a stable growth momentum.

Source: OECD

Food PriceFAO Food Price Index remained nearly unchanged from November (160.8) averaging 161.7 points in December 2018. For the whole of 2018 FFPI averaged 168.4 points, down 3.5% on 2017, with dairy reporting a year-on-year decrease.

The Dairy Price Index in December averaged 170 points, down 3.3% from November, this is the 7th consecutive month of decline. International price recordings for cheese, butter and WMP trended down, this was likely due to increased export supply, especially from New Zealand. Skim Milk Prices have responded to a stronger global import demand with a marginal price increase. For the year of 2018 the index averaged 192.9 points, 4.6% below 2017’s average, due to decreases in reported price across the board for dairy products towards the end of the year.

Source: FAO

ConsumerThe Economist Intelligence Unit (EIU) anticipates that the UK will not leave the EU on March 29th, 2019, due to the expected extension of Article 50. Though there is still the possibility of a second referendum, EIU continues to expect a version of the November Brexit deal negotiated between the UK and EU to be approved.

Germany’s economy has been impacted by the US-China trade war, as EIU notes both exports and imports have been struggling. Coupled with the contraction of Germany’s industrial production, EIU revised down their 2019 real GDP forecast from 1.6% to 1.2%.

EIU predicts dated Brent Blend prices to drop to US$66/barrel in 2019 (down from US$71.1/b in 2018), due to larger than anticipated supplies from Iran and reduced demand growth.

Source: Economist Intelligence Unit

GLOBAL INDICATORS

13

Actuals

GDT Fonterra Dutch Dairy Board USDA Oceania

USDA NASS CME Spot EU Commission

Forecasts

NZX Futures CME Futures

Rabobank Oceania Informa Oceania

Price changes were minor for WMP in December. Dutch Dairy Board remained flat at USD 3,013/MT. GDT recorded a -2.4% decline to USD 2,659/MT. USDA Oceania data was not available at time of publication.

Futures and forecasts for January to June 2019 are pricing similar to the current market. Rabobank Oceania’s average price for the next 6 months is USD 2,875/MT. NZX Futures are reporting an average price of USD 2,832/MT. Informa Oceania data was not available at time of publication.

November prices for butter remain mixed. We see Dutch Dairy Board and CME Spot remain flat with USD 4,853/MT and USD 4,131/MT respectively. GDT reports a -8.7% decline to USD 3,936/MT. USDA Oceania data was not available at time of publication.

Futures and forecasts over the next 6 months report average prices ranging from USD 4,500/MT to USD 5,505/MT. Informa Oceania data was not available at time of publication.

There was a break in the continued decline in cheese prices in December. With GDT reporting a +3.2% growth to USD 3,471/MT and CME Spot saw a +1% increase to USD 3,106/MT. EU Commission however continues to decline with a -3% drop to USD 3,563/MT. USDA Oceania data was not available at time of publication.

Futures and forecasts for January to June 2019 are pricing similar to the current market. With average prices ranging from USD 3,400/MT to USD 4,453/MT. Informa Oceania data was not available at time of publication.

December SMP prices were mixed. GDT recorded a -7.1% drop to USD 2,043/MT. whilst Dutch Dairy Board saw a +6.3% jump to USD 1,811/MT and USDA NASS reported a slight +1.4% growth to USD 1,981/MT. USDA Oceania data was not available at time of publication.

Average futures and forecasts for January to June 2019 are tight with average prices between USD 2,095/MT and USD 2,183/MT. Informa Oceania data was not available at time of publication.

WMP

Jan

19

Feb

19

Ma

r 19

Ap

r 19

Jun

18

Jul 1

8

Aug

18

Sep

18

Oct

18

Nov

18

Dec

18

$1500

$2000

$2500

$3000

$3500

$4000

Ma

y 19

Jun

19

SMP

Jan

19

Feb

19

Ma

r 19

Ap

r 19

Jun

18

Jul 1

8

Aug

18

Sep

18

Oct

18

Nov

18

Dec

18

$1500

$2000

$2500

$3000

$3500

$4000 M

ay

19

Jun

19

BUTTER

Jan

19

Feb

19

Ma

r 19

Ap

r 19

Jun

18

Jul 1

8

Aug

18

Sep

18

Oct

18

Nov

18

Dec

18

$1500

$2000

$2500

$3000

$3500

$4000

$4500

$5000

$5500

$6000

Ma

y 19

Jun

19

CHEESE

Jan

19

Feb

19

Ma

r 19

Ap

r 19

Jun

18

Jul 1

8

Aug

18

Sep

18

Oct

18

Nov

18

Dec

18

$1500

$2500

$3500

$4500

$5500

$6500

$7500

Ma

y 19

Jun

19

Source: https://www.globaldairytrade.info/en/product-results/

COMMODITY PRICES

NZMP PERSPECTIVE February 201914

GDT SALES BY DESTINATION

TRADING EVENT 229

Fonterra GDT Results

Financial Year to DateLatest Auction

North Asia (including China)

South East Asia

Middle East and Africa

Latin America

Other

The New Zealand dollar declined in December as a weakening global outlook and soft domestic growth data impacted the currency, but has subsequently increased in January.

Source: https://www.globaldairytrade.info/en/product-results/

GDT RESULTS

TRADING EVENT 229

+6.7%usd3,265

Change in GDT Price Index from previous event Average price (USD/MT, FAS)

WMP AMF SMP BUTTER

+8.4% +5.8% +3.9% +4.2%

$3,027 $5,579 $2,534 $4,445

RENNET CASEIN BMP CHEDDAR LACTOSE

+10.9% -3.1% +1.4% +1.3%

$5,596 $3,158 $3,565 $1,035

GDT PRICE INDEX

TRADING EVENT 229

GDT PRICE INDEX NZD/USD SPOT RATE

The next trading event will be held on 19 February 2019. Visit www.globaldairytrade.info for more information.

45,761 MT

22,717 MT

PRIC

E IN

DEX

15

Recent developments Milk production predictions have decreased for 2019 to 220.6 billion pounds based on recent data and lower than expected milk prices. Milk production per cow in October 2018 was 1,912 pounds, which is 21 pounds higher than October 2017. NASS estimates cow numbers now average 9.365 million head in October, which is 2,000 head less than September, in the recent weeks dairy cow slaughter has been up on the same time last year.

From November to December, prices dropped for the majority of dairy products on the USDA National Dairy Product Sales Report (NDPSR). The 40-pound blocks of cheddar cheese saw the largest decline with a 19.6 cent per pound drop. The cheese price forecast for 2018 and 2019 has been dropped significantly due to several factors, including high stock levels and weaker domestic use. 500-pound blocks of cheddar cheese, butter and dry whey also saw price drops of 1.7, 1.0 and 0.4 cents per pound, respectively. Nonfat dry milk (NDM) did see a small uplift of 1.2 cents per pound.

Dairy forecasts for 2019Milk production in 2019 is projected at 220.6 billion pounds, a decline of 0.3 billion since last forecast. This reflects the smaller milking herds continuing in 2019, with forecast being lowered to 9.365 million head, down a further 10,000 from previous forecast. Milk per cow forecast has also dropped 10 pounds to 23,555 pounds.

On a milk-fat basis, forecast for 2019 imports is 6.7 billion pounds, an increase of 0.5 billion on previous forecast. This is due to higher than expected butter imports. Export forecast has risen 0.2 billion pounds to 10 billion following the anticipated growth in butteroil and AMF exports. Domestic use has had a weak growth recently, therefore forecasts of domestic use has been lowered to 216.3 billion pounds on a milk-fat basis, with ending stocks raised to 13.7 billion pounds.

On a skim-solids basis, import forecast in 2019 is 5.2 billion pounds, slightly decreased due to the decline in MPC imports anticipated to continue in 2019. Exports are still expected to remain at 44.1 billion pounds. The weak domestic use is also impacting skim-solids with 2019 forecasts reduced to 180.9 billion (-0.3 billion below

last forecast). However, ending stocks have been lowered to 10.4 billion pounds due to the lower NDM and Whey product stocks offsetting the increase in cheese stocks.

As previously anticipated the present weak cheese price is expected to continue into 2019. This, coupled with the high stock levels has resulted in the cheese price further reduced to $1.495-$1.575 per pound. With these cheese prices, it is likely milk will start to shift from cheese manufacturing to butter and NDM. This may result in a reduction in whey solid production and an increase in the dry whey price forecast for 2019, now set to $0.405-$0.435 per pound. Low butter prices are also expected to continue at $2.200-$2.310 per pound for 2019. The NDM price forecast remains unchanged at $0.835-$0.895 per pound.

The continued decrease in cheese prices is offsetting the expected growth in dry whey prices, this is impacting the Class III price forecast for 2019, which has dropped to $14.65-$15.45 per cwt. With this reduction in Class III price forecast it is anticipated the all-milk price for 2019 will also drop to $16.40-$17.20 per cwt.

Sources: USDA

USDA, Dairy OutlookPublished December 2018

INDUSTRY COMMENTARY

October exports were 919 million pounds (on a milk fat equivalent basis), up 71 million pounds from September and 136 million pounds from October 2017. For several dairy products, there was an increase in exports from September to October, notably butteroil and AMF exports increased 3.8 million pounds to 7.7 million pounds in October; 86.6% of these exports were to Mexico. Skim-solids milk-equivalent basis, exports increased 64 million pounds from September to 3.510 billion pounds in October (up 12 million pounds on the same time last year).

Imports on a milk-fat basis were 620 million pounds, up 88 million pounds on October 2017, and 71 million more than September 2018. Compared to the same time last year, the imports of butterfat products are high. Imports on a skim-solid basis were 427 million pounds, down 68 million pounds on October 2017, but up 72 million more than September 2018.

NZMP PERSPECTIVE February 201916

Blimling focuses on the Class III / Class IV spread as the 12-month forecast average for Class IV eclipsed the Class III average in early November. The last time a forecast like this played out was 2013. With Class IV sitting approximately 30-cents per hundred-weight above Class III. Because of this people are speculating if milk will move from cheese manufacture to butter/powder. Blimling predicts that the risk of this is low in the USA in-part because of the rigidity of the Federal Order System. However, in New Zealand and Europe the limited market regulation allows for more flexible direction of milk into the highest return, so we may see a shift.

Blimling predicts that the weak cheese price will continue in early 2019 due to the large stock volume. In butter, the supply is more restricted than anticipated. This, coupled with the sustained demand for deferred coverage means the butter market will find modest support. For US NDM/SMP Blimling predicts that continued export demand and lighter fresh supply will support the market. However, these prices may have a cap due to supply growth out of US and NZ. With a restricted Dry Whey supply it is likely whey prices will be supported in the short-term.

Blimling, Forecast UpdatePublished 31 December 2018

Sources: Blimling

INDUSTRY COMMENTARY

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AMF Anhydrous Milk Fat

BMP Butter Milk Powder

CME Chicago Mercantile Exchange

DDB Dutch Dairy Board

EIU Economist Intelligence Unit

FAO United Nations Food and Agriculture Organisation

Farmgate Milk Price The price for milk supplied in New Zealand to Fonterra by farmer shareholders

Fluid and Fresh Dairy The Fonterra grouping of fluid milk products (skim milk, whole milk and cream pasteurised or UHT processed), concentrated milk products (evaporated milk and sweetened condensed milk) and yoghurt

FTA Free Trade Agreement

GDI Global Dairy Intelligence group, Fonterra Cooperative Group Limited. GDI provides insights to Fonterra management based on a model of the global dairy market developed by GDI and populated with publicly available data. The model outputs referenced in this report do not reflect Fonterra’s non-public production or sales data

GDP Gross Domestic Product

GDT Global Dairy Trade auction platform

GDT Price Index is an index that provides a measure of the weighted average percentage change in the movement in price of all products sold on GDT. This provides a simple measure of changes in dairy price between trading events

IMF International Monetary Fund

Informa Informa Economics Inc., Dairy Group, Global Dairy Market Report

LME Liquid Milk Equivalent

MAT Moving Annual Total (this is data averaged across the 12 month period)

MEA Middle East and Africa

NDM Non-fat Dry Milk

NZX NZ Stock Exchange

OECD Organisation for Economic Co-operation and Development

Q[1] [First] Quarter

Reference Products The dairy products used in the calculation of the Farmgate Milk Price, which are currently WMP, SMP, BMP, butter and AMF

SEA South East Asia

Season New Zealand: A period of 12 months to 31 May in each year. Australia: A period of 12 months to 30 June in each year

SMP Skim Milk Powder

TE GDT Trading Event

USDA NASS US Department of Agriculture National Agricultural Statistics Service

USDA Oceania US Department of Agriculture Agricultural marketing service price series for specific products in the Oceania region

WMP Whole Milk Powder

YOY Year-on-year

YTD Year to date

Fonterra draws the information in this update from a variety of principally external sources listed below. Also included are defined acronyms for better understanding.

GLOSSARY

NZMP PERSPECTIVE February 201918

Tracking the global dairy market Production, Export and Import chartsThe production, export and import charts illustrate year-on-year changes in production, exports and imports for a range of countries that are important players in global dairy trade.

The absolute size of the bars represents the change in production, exports or imports compared to the same month the previous year. The portion of the bar below zero represents a year-on-year decrease and the portion above the line shows the year increase for that country. Where countries are not shown this is likely due to the data not yet being available.

Weather Source (Page reference – 11)Comments on weather are obtained from various government weather sites as well as independent reports including Martell Crop Projections. Global milk production data is sourced from government and industry websites including US Department of Agriculture (USDA), EuroStat, Dairy Australia, Dairy Companies Association of New Zealand (DCANZ) and others.

REFERENCES

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Important note: The information and commentary contained in this ‘Perspective from NZMP’ is based on publicly available official government statistics; industry association reports; other published industry reports together with data and insights developed by Fonterra’s Global Dairy Intelligence group (‘GDI’). These sources are identified as appropriate in this ‘Perspective from NZMP’. GDI insights and data are derived from a global dairy market model populated by publicly available data. The model inputs and outputs do not reflect Fonterra’s non-public production, pricing or sales data. Fonterra Co-operative Group Limited and its group members involved in the manufacture or sale of NZMP branded products (‘Fonterra’) has provided this ‘Perspective from NZMP’ for informational purposes only. It does not constitute recommendations or advice for the purposes of making financial decisions regarding trading in dairy products or commodities, or dealing in financial instruments relating to dairy commodities. Although every effort is made to ensure the accuracy of reproducing and interpreting such information, no warranty or representation of such is made and Fonterra shall have no liability in respect of any reliance placed on such information in the formulation of any business decision.