Morning Dairy Comments, 10/02/2015

Friday, October 2, 2015

General Market News

· U.S. economy creates 142,000 new jobs in  September (falls short of expectations)

· U.S. stock futures sharply lower

· Fed's Rosengren says rate hike in 2015 is 'reasonable forecast'

· Lew says U.S. will reach debt limit by November 5

· Asian shares close mostly lower

· Mondelez is exploring the sale of its European cheese and grocery business as it sharpens its focus on snake foods and refreshments


Class III, Cheese, and Whey

Although the butter/powder trade took the limelight yesterday, it was their strength that seemed to underpin both class III and cheese futures. Support was also found in a firming spot cheese market, which pushed the price of block cheese back over $1.70 for the first time in a month.  Barrels also pushed slightly higher but selling pressure seemed to limit gains widening the block/barrel spread to 13.25 cents.  Ultimately, however, class III and cheese prices were rather lethargic yesterday –scratching out only mild gains amid a generally strong day for the dairy complex as a whole.

Yesterday's Dairy Products report most likely won't inspire swift directional change either.  August American cheese production arrived largely as expected at 388.8 million lbs. versus our expectations of 389.7 million lbs.  Total production arrived at 974.9 million lbs. slightly below our expectations of 978.6 million lbs.  Production levels are 74.9 million lbs. above the 5-year averages for total cheese and 28.9 million lbs. for American cheese, which appears to be a limiting factor for price gains especially when weighed against last week's August Cold Storage report.  Nevertheless, price action at the exchange continues to be well-supported.

Dry whey futures finished modestly higher yesterday as buyers seemed to grab offers slightly above the market as NFDM rallied. The bearish story for dry whey hasn't changed as evidenced in yesterday's Dairy Products report. Whey production continues to show impressive gains coming in this month up 3.9% from July at 83.9 million lbs. (82.9 million lbs. human grade).  The production side of the equation is not the surprise, however.  For that you have to look at inventories.  Stocks levels ballooned by 6.9% to over 81 million lbs. in a counter-seasonal increase. We expect that this kind of number is already in the marketplace; however, as futures have been gripped by bear claws for months now. 

We expect a mixed opening for Class III, Cheese and Dry Whey.

Spot Session Results











UP 4







UP 2 ¼














DN 30




Class IV, Nonfat, and Butter Futures

You can't keep a good powder market down apparently.  NFDM buyers chomped away at offers, bidding the Grade A spot market up 10 cents to finish at $1.0600 – the highest first close above $1.00 in nearly six months.  While we expect the market to catch its breath in the low-$1.00 range, our upside objective is now $1.20.  Not to be outdone, NFDM futures traded a whopping 409 contracts yesterday – more than butter and Class IV combined (366 contracts) – and traded limit-up in several months intra-day before finishing mostly 1.000 to 3.000 higher.  We called the news in the Dairy Products report "bullish" for NFDM.  
Nonfat production surpassed our expectations by 6.5 million lbs. at a total of 12.4 million lbs. (we expected 117.9 mm lbs.).  August was marked by strong shipments and a healthy net drawdown of NFDM inventories.  Manufacturer's stocks dropped by 39 million lbs. during August – the largest drawdown in NFDM stocks since September of last year when we pulled 66.6 million lbs. out of the warehouses.  One question the trade will be pondering now ought to be, was this demand pulled forward from September due to favorably low prices in August or is there a bigger drawdown still looming ahead?  We tend to think the buyers are not done and that drawdowns will continue to be strong thru October. 

Grade A NFDM Spot Market – Weekly Chart


Spot butter was back at it again yesterday, rallying 19 cents to finish at $2.70 thus ending the similarities with last year's price action (spot butter dropped to $1.80 before a meaningful bounce last year).  Futures also gained traction to the upside once again erasing some of Wednesday's losses and ending a three-day downward spiral for prices.  We called the Dairy Products report slightly bullish as butter production was down 1.2% to 128.6 million pounds in August but came in higher than our pre-report expectations of 125.7 million lbs.  Production was higher than we anticipated coming in 2.8 million pounds above the five-year average, but still production was lower from last month and last year as milk made its way into cheese or was sold as fluid.  When it all balances out, however, this report is not likely very impactful for the market one way or the other as the trade continues to find some level of stability amid a fat crazed world. 

We expect a steady to higher opening for Class IV, NFDM and Butter futures.



NZX futures finished steady to mostly lower during their most recent session to close out the week.  WMP showed most of the declines followed by stability in both SMP and AMF.  The Bank of New Zealand announced its expectations that NZ milk production will drop by 6% - a quicker rate that previously thought and not seen since the 1990s.  We expect that the NZX futures markets have likely baked in some portion of lower milk production expectations already. 
Fonterra announced they will raise volumes of product for offer during the next GDT event on October 6.  WMP was kept steady while SPM has increased by 600t across all contract periods, which is an increase of 8.5%.  AMF offerings declined slightly with contract periods 2 and 3 seeing 50t – or 2.7% less - than was previously forecast. 

The grain complex is has been largely sideways around current levels.  Bullish news seems to be quickly quashed by outside deflationary factors – particularly for soybeans.  The USDA trimmed stocks on Wednesday and then yesterday we saw strong exports (2506.0 thousand tons vs. 1300-1700 thousand tons expected) and yet the market not only took it in stride, but also closed near the trading lows of the day yesterday.  Corn prices are having trouble gaining any traction to the upside in this environment too, but both remain at or above their respective 20-day moving averages (support).  Harvest pressures are holding prices down, but so far our expectations that the harvest lows are in has held true.

The trade looks to be choppy for the next several days as traders await the USDA supply & demand estimates due next Friday (October 9).  INTL FCStone is expecting the national corn yield at 167.0 bushels per acre, up from 165.9 bpa last month, though still below the USDA's 167.5 bpa. Soybean yields at 46.9 bpa, up a bushel and a half from last month but still below the government's 47.1 bpa September estimate.

Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

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