Morning Dairy Comments, 11/09/2015

Monday, November 9, 2015

General Market News

· Maersk CEO warns on global growth, OECD cut forecast

· Goldman closes BRIC fund after years of losses

· San Francisco Fed President Williams said the decision to keep rates unchanged in October was a close call

· Crude Oil up this morning as US Dollar consolidates last week's sharp rally

· Jerome Jobs: Immigration Laws big Deal for Jerome's Dairies



Class III, Cheese, and Whey

There's been no shortage of negative commentary around the dairy complex lately.  We've been a part of the mix in reporting on largely bearish sentiment particularly regarding the cheese market. Hefty supplies matched against only "good", but not remarkable, domestic cheese demand in October gave way to a somewhat lower trajectory to spot pricing to end last month.  From a historical perspective, if the price of cheese is falling – even modestly so – at the end of National Pizza Month, it stands to reason more price weakness could be in the cards for the balance of the year. 
But the first week of this November changed all that. Block cheese prices were up 8 cents last week, to close at $1.7000/lb.  Barrel cheese ended the week 5.50 cents higher at $1.6500/lb.
If you were to look at the block market alone, a rise of 8 cents would be somewhat diminished by the fact that there was only one load that traded all of last week.  BUT the barrel market traded 23 loads last week, which is in line with trading patterns from October when we traded a total of 92 barrels at the exchange. The net result is that demand for cheese at the exchange is still alive and well and now prices are traveling upward. 
Class III and cheese futures have been reluctant followers of spot action and, frankly, we'll likely have to see more spot strength if nearby futures prices will continue to move higher in the near-term.  However, the key for today is that the spot/futures relationship we've been living with for most of 2015 is shifting lately.  The carry market has evaporated as spot prices pushed higher without much of a lead from futures.  The shift is actually somewhat bullish price action at a time when we don't have much in the way of supportive information.
Look for spot to remain stable to higher early this week and for futures to continue to chop around in the shadows of spot action.
The Dollar Index exploded to a new recent high following the employment report released Friday morning.  The American economy added 271,000 jobs in October, a very strong showing that makes an interest-rate increase by the Federal Reserve much more likely when policy makers meet next month.
Dry whey futures traded lower Friday will all of the 99 contracts exchanging hands doing so in 2016.  We don't see much reason for strength today – particularly in 2016 contracts, which continue to work off some of the price premium put on in October.  The January to December pack average is now 32.15.  We look for it to be supported around the 30 cent level. 
The midpoint Central dry whey mostly price was up 0.25 cents from the previous week, at 20.75 cents but 38.13 cents lower than the comparable period in 2014. The Central dry whey mostly for October averaged 20.45 cents, 40.60 cents lower than 2014's price but up 0.01 cents from last month. During the month, the dry whey price was up 1 cent at 20.50 cents.

For Central and West 34% whey protein concentrate, the midpoint of the mostly price was reported at 53.50 cents per pound, unchanged from the previous week, according to Dairy Market News. The Central and West 34% whey protein concentrate averaged 53.33 cents for October, 80.25 cents below 2014 and down 2.77 cents from last month. During the month, the whey protein concentrate price lost 0.50 cents to 53.50 cents per pound.

We look for class III, cheese and dry whey to open mostly lower.

Spot Session Results











UP 5 ¼







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Class IV, Nonfat, and Butter Futures

NFDM price stability late last week arrived with a sharp decline in trading activity for that contract.  Just 10 NFDM contracts changed hands on Friday mostly at or very close to unchanged from the previous day.  The spot call has found some level of support here in the low-80 cent range and we expect that to continue early this week.  Last week, the spot price was up 0.50 cents at 81 cents per pound, with 11 trades - 35 cents below last year's price.

Dairy Market News reports the midpoint Western nonfat dry milk (NFDM) mostly price at 85 cents per pound, down 3.50 cents from the previous week. The price is 45 cents below 2014's price. The Western nonfat dry milk mostly price averaged 93.26 cents in October, 45.60 cents below 2014 but 9.01 cents per pound higher than last month. The nonfat dry milk price was 3.75 cents lower during the month to finish at 88.50 cents per pound.
The California Department of Food and Agriculture (CDFA) reports the weighted average price received for NFDM sold by California processors was 84.16 cents per pound for the week ending October 30, down 3.98 cents from the previous week.
Butter futures finished mostly higher Friday as the spot butter market continued to edge out a slight, 1.00 cent gain to close the week at $2.8850.  Although the price continues to be supported, the number of would-be buyers on the exchanged has diminished this month at current price levels.  We'd expect that the butter market is on borrowed time up at current levels, but there has been a lack of willing sellers.  Milk production declines in California continue to adversely affect butter production in that state, which is one reason for the lack of selling we've seen so far in November. 
Butter holdings in selected storage centers, as reported by Dairy Market News on November 2, were down 7.8% from the previous week, at 11.9 million pounds, and are 2.2% below 2014.

We look for a mixed opening on NFDM, butter and class IV milk.

NZX Futures

Overnight saw mostly flat pricing for NZX dairy futures.  Cold, wet weather continues to affect forage quality in New Zealand, while the early effects of El Nino could be playing out in Australia.  Although sources tell us that drier weather has not affected milk production yet, the Bureau of Metrology (BoM) expects warmer than average temperatures to mix with lower than average rainfall in the north and southeast part of Australia in their long-term forecast. 
We expect NZX prices to continue to chop sideways around current levels to begin the week.
Looking to Europe, last week saw the EEX weekly volume record breached with 320 lots of SMP trading. This breaks the previous weekly record for SMP, set the week starting October 19 with 241 lots. From the start of September there has been a big uptick in SMP volume, with 1134 lots trading – 2.5x that of butter which normally has seen the highest volume. The last four weeks have been three of the four top trading weeks for SMP on record, helping to bring the year to date volume to 1496 lots, up 17.6% on the full 2014 SMP volume.


Corn and soybeans finished last week on a modestly higher note, a few pennies higher by the closing bell Friday. Nearby wheat closed lower and opened lower Sunday night.  The markets have been rather choppy to slightly lower over the past week as the market braces for tomorrow's USDA crop report (see estimates on following page).  An uptick in corn yield tomorrow would be the first time since 2005 that yields rose in both October and November.  The last three October increases were followed by November declines. 
We've mentioned that we think harvest lows are in for some time. An increase in yields tomorrow could send us lower – but how much lower?  Prices are currently sitting some 10-15 cents above the August/September lows for both corn and soybeans right now.  Prices have pushed below recent lows for soymeal, but still remain about $10/ton above 2015 lows.  We expect that the markets have already dialed in yield and production expectations on tomorrow's report, so those numbers will likely have to be heavier than expected to spark new selling.

From an end-user perspective, perhaps the best thing to consider now is current corn and soybean levels relative to historical price action.  As you will see in the charts below, current negative fundamentals of a bumper crop have really worked their way nicely into the forward curves. 



Corn and soybeans are called to open slightly higher while wheat is expected to open lower in line with the overnight trade. 


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