Morning Dairy Comments, 10/21/2015

Wednesday, October 21, 2015

General Market News
  • US crude oil stocks up 7.1 bbls vs. expectations for a 3.9 bbl increase
  • The Atlanta Fed is projecting Q3 GDP growth to come in at about .9%. That's down from 5% last year in Q3
  • Housing starts surge in September
  • Chinese investors pull pin on Otorohanga dairy factory
  • Dairy markets to continue growth despite short-term woes



Class III, Cheese, and Whey

It was a relatively tight trading range for the class III market yesterday as prices were mixed with nearby months following the spot market a bit lower while deferred contracts found some support. Volume was firm with over 1,000 trades taking place, Oct through Feb futures were steady to 11 lower while 2016 contracts from there forward were steady to +6 cents on the day. Interestingly we continue to hear a number of reports of cheese being in balance to a little tight but the spot market is moving the opposite direction. We are very near the lower end of the recent range, blocks haven't been below $1.59 since late April and settled yesterday at $1.6250. We think there is still a bit of holiday demand out there leading to the rhetoric of the market being in balance to a bit tight currently.

We called the milk production report 'slightly bullish' vs. expectations and the trend of lower cow numbers is supportive of futures prices. September production continued to be heaviest in the upper Midwest cheese country.  The skew, which we've witnessed for much of 2015, is a bearish influence on cheese markets. This is not news. The trend hasn't changed much and we've continued to stay mostly in balance.  Perhaps that's a trend that needs to continue to keep us from moving higher.
We wouldn't expect yesterday's report to have a significant impact on the futures market today.  Even if you weigh the report as more 'neutral' versus consensus, we don't see a reason for nearby or Q1 futures to tumble on this report.  Nearby and Q1 futures prices have – in many cases – traded modestly lower every day for seven sessions and is looking short-term oversold. 

The whey market was active yesterday and it was mostly lower pricing which was a negative influence on class III futures. Settlements ranged from steady to -0.700 lower on the day as it appears the downside technical momentum continues. The weaker GDT auction, results below, likely caused some spillover bearish sentiment as well on whey.

We look for Class III and Cheese to flat, slightly higher.  Dry Whey is called to open mixed.

Milk Production Report

Total US milk production came in at 16.587 billion pounds for the all US below our expectation for 16.670 billion pounds and up 0.4% year over year. Previous month revisions continued to be higher with August revised up 15 million pounds but what we took as the most surprising part of this report was the sharp decline in cow numbers. All US milk cows came in at 9.310 million vs. expectations for 9.323 million this was down 5,000 head from last month and now down 13,000 head from our peak in May. This contractionary trend in month-to-month cow numbers leaves us feeling this report is supportive longer term.

The 23 state milk production was 15.583 billion pounds vs. our expectation for 15.661 billion up 0.4%. Interestingly while milk cow numbers for the all US were lower than expected milk cows in the 23 states were unchanged vs. last month vs. our expectation for a slight decrease of 3,000 head. California continues to be lower on milk production year over year coming in at -3.6% as milk per cow is down substantially while cow numbers are virtually unchanged. Other states showing a loss, Oregon, -2.9%, New Mexico, -2.0%, Pennsylvania, -1.9%, Vermont, -1.9% and Washington, -0.2% seemed to be mostly a result of lower milk per cow as well. South Dakota is the fastest growing state +12.6% by a massive margin as Colorado, +4.4% was the next largest increase in milk production. Upper Midwest states continue to show the largest gains, mostly as a result of an increase in the herd size. Michigan, +4.0% was followed by, Wisconsin, +3.1%, Indiana, +2.8%, Minnesota, +2.2% and Iowa, +2.1%.


Spot Session Results

























DOWN 2 ¼











Class IV, Nonfat, and Butter Futures

All eyes were on the class IV markets today as the GDT was lower for the first time since the August 4th auction and that weakness spilled over into the NFDM futures market. Settlements ranged from -1.825 to -3.975 nearly a limit move for the Nov through March 2016 contracts. The international market seems to have, for now found a home near the $1.00 mark and with futures trading well above that for 2016 months some price pressure was likely warranted. Volume was extremely heavy yesterday with near 400 trades occurring for NFDM. The question now that we've seen a lower GDT is what comes next and while the headlines continue to be supportive it would seem as though buyer's volumes have been satisfied in the short term so a continued pullback seems likely. Weekly CWAP prices were supportive this week coming in at 91.74 cents an increase of 4.66 cents though volume was down sharply to 9.3 million pounds from 16.2 million last week.

It was an interesting butter trade yesterday as the GDT result while lower was actually a bit firmer for AMF and the spot session saw a large decline but plenty of buying interest. We settled down 9 cents at $2.44 on 9 trades for spot and that pushed Nov futures down 2 cents on the day despite already trading at a sharp discount vs. spot, settling at $2.22 yesterday. While the nearby contracts were steady to lower the deferred contracts were 0.250 to 1.975 cents higher from Jan through June 2016. Perhaps patience to see the market break is running thin? Perhaps this was simply a light volume move too as no more than 10 trades took place in any of the early 2016 months. For now we'd lean toward the latter especially as the US holds a significant premium vs. the International market which should continue to mean higher fat imports as the EU in particular looks to move excess product.

Class IV futures were mostly lower on the day following the NFDM moves which were more than enough to offset some of the butter gains. May was the only contract to settle in the green, +9 while other contracts from Nov through June were 1 to 37 cents lower on the day. So long as the NFDM price pressure continues it would seem unlikely that class IV futures can recover.

NZX Futures

NZX markets tumbled across the board today following yesterday's weaker GDT results.  WMP fell $105 to $280/mt on heavy volume.  SMP traded and similar fashion as well as AMF and Butter.  We mentioned over a week ago that NZX futures seemed ripe for a correction lower. It seems that yesterday's GDT is helping to drive that downdraft.


We look for a lower opening for NFDM, Butter and Class IV.


The grain markets traded mixed on Tuesday opening higher moving back toward unchanged then finally closing firmer with wheat and soybeans leading the gains up 5 cents to $8.96 for Nov beans and up 5.50 cents on December wheat to $4.9125. Corn finished the day up 3.75 cents at $3.7675. Demand seems to still be the big story as export inspections were record large for the second straight week and crush margins remain very strong. Farmers are also reportedly putting a lot of grains in private on-farm storage keeping processors hunting for grains despite the on-going harvest. Option expiration for the November soybean contract comes this Friday and we are hanging around the $9.00 mark. Perhaps next week will be a key driver as big moves frequently come following expirations.

We look for a mixed opening for the grain complex.

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