Morning Dairy Comments, 09/21/2015

Monday, September 21, 2015

Robert Chesler


· Moody's downgrades France from Aa2 to Aa1

· With the Feds lack of action on rates last week equities were under significant pressure to close out the week though overnight we were firmer

· The USD is firm to start the week up over 600 points this morning

· Interestingly despite the USD strength crude oil is up over 2.5% this morning as well

· Fed leaders will speak throughout the week following last week's decision to hold rates, Atlanta's Fed president starts things off today after St. Loui's Fed President over the weekend stated his desire to raise rates



Class III, Cheese, and Whey

Class III and cheese futures finished last week in mixed fashion and on light trading volume. The trade was not enthralled by the block/barrel spread widening out to 15 cents Friday.  Fresh block cheese closed out last week only slightly snug as reports were that some buyers had mild difficulty sourcing loads.  Barrels, on the other hand, seemed to be more plentiful last week and we're not sure that will change today. 

Meanwhile, the USDA delivered a rather unexciting August milk production report after the close on Friday. We don't see much in the way of impact to the markets per se off of this report alone. Its longer term implications of slowing production could be a more important underpinning factor down the road. (see our report below). 

We expect a mixed open today for class III and cheese.

Milk Production Report

The August 2015 milk production report was released today and we view it as neutral in comparison to expectations.

The USDA offered up a rather bland milk production report today that will most likely have little impact on trading Sunday night into Monday.  Coming in at just a shade under 1% growth, today's report was nearly smack dab on our pre-report expectations and offered little in the way of change from what has become a repetitive look at U.S. milk production trends: Western milk production losses covered by gains east of the Rockies.

Milk-per-cow losses continue to be the key issue.  In Washington, Oregon, New Mexico and, of course, California drought conditions remain at least one main factor affecting the availability of quality feed leading to less overall production.  Add in compressed profit margins and we see a slightly negative impact on producer sentiment around bolstering milk supplies.  California alone lost 65 lbs. per cow in August.  Juxtapose that against Wisconsin milk-per-cow, which was up 75 lbs., and we don't see that much has changed with regards to the production of milk in the country.

On a per pound basis, the U.S. produced 17.366 billion lbs. - a record level for the month of August.  Although the milk production gains were 1% below the 5-year average increase for the month of August, the report hammers home the fact that we currently have plenty of milk in aggregate.  But we think the important take-away from this report is just how dangerous the production routine has become.
There seems to be a material level of complacency around milk production because, let's face it, these reports have all looked remarkably similar month-over-month for most of 2015.  With global milk production at borderline burdensome levels in some cases, we've had the luxury of some stability to milk during one of the worst natural disasters in the country's history.
Because drought happens slowly overtime and not overnight, we've been able to ignore the fact that more than 20% of the U.S. milk supply remains in a rather perilous environmental situation going forward.  And if the skies open up and the west gets some drought-denting moisture, it had better fall as snow in the mountains – because El Niño type rains are not necessarily going to benefit the milk-per-cow situation out there in the short-term.  So that leaves those states that have been carrying the weight for Western milk losses in the potentially precarious position of actually having to maintain significant growth rates in order to keep balance.
We don't see the story of milk production changing next month or even for the rest of the year.  But this report really serves as a reminder of the pit-falls of such a 'routine': we shrug-off just how significantly unbalanced the displacement of milk in the U.S. right now – and likely for many months to come.



Spot Session Results











UP 3 ¼ 







DOWN 3/4







UP ½   







UP 3 ½ 




Class IV, Nonfat, and Butter Futures

The class IV markets finished the week mostly higher with good volume seen in both butter and NFDM futures. Class IV futures were also higher albeit on lighter volume. Settlements on class IV were steady to 20 cents higher, butter finished from -1.650 cents to limit higher and NFDM was steady to +2.275 cents on the day. The spot butter market surpassed the $2.70 mark and NFDM continues to set fresh highs for the recent move. The GDT auction was extremely strong last week and pushed the NZX futures higher supporting the domestic market movement. As you can see below prices were firm once again to open this week. European prices were also firm last week. While the international and domestic price momentum continues to be strong we are nearing the point where the butter market topped last year and we don't expect this year to be much different. As you saw above we are looking for a pullback in butter stocks for tomorrows cold storage report but that stock level if realized would likely have the market in a comfortable position and along with the news of cream starting to loosen up a bit in the marketplace leaves us open for a similar pullback to what we saw a year ago. It would be hard to imagine NFDM continuing to move higher if the butter market experienced a significant sell off so we will be keeping a close eye out over the next week plus and particularly on tomorrow's cold storage report.

We expect a steady to higher open this morning for class IV and the products.



The technical buying immediately following the recent September USDA crop reports has come under pressure over the past three or four trading sessions the harvest rolls on and world demand picture darkens.  While reports of really good yields and a nice harvest weather situation are plentiful, we're also hearing, somewhat expected, stories of really poor quality yields.  The wet weather pouring over the Eastern Corn Belt in June is coming to roost. 

Brazilian agricultural agents, officials responsible for approving export shipments at port, began a strike on Friday for higher wages and against government cuts. The strike comes when there is a seasonal increase in corn exports, so any slowdown in Brazilian exports of corn (and to a lesser degree soybeans) may underpin U.S. exports.
So far, both corn and bean export sales are off to a slow start in the 2015/16 (Sept-Aug) marketing year in part due to weak carry-over sales.  Soybean sales over the past two weeks have totaled almost 100 million bushels, 9 mbu ahead of the comparable two weeks last year, but cumulative sales of 624 mbu now stand 312 mbu behind last year's early pace. Two-week corn sales of 37 mbu basically matched last year, but cumulative corn sales of 368 mbu now stand 147 mbu behind last year.

We'll see if the USDA makes any adjustments in October. Or if governmental issues heat up and hold up exporting business at all out of South America. For now the markets are choppy to lower over the past few days and again this morning.  We'd expect more of that in the coming days above recent price lows

We expect a mixed opening for Corn, Soybeans and Wheat this morning, soybeans slightly higher with corn and wheat slightly lower.

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