Morning Dairy Comments, 12/02/2015

Wednesday, December 2, 2015

General Market News

· Euro falls as weak Eurozone inflation puts pressure on the ECB

· Chinese stocks rally most in a month on hopes of additional stimulus

· Puerto Rico avoids default on over $350 million in bond payments

· Russian oil output remains near record level ahead of OPEC annual meeting



Class III, Cheese, and Whey

Class III futures finished yesterday’s trading session with mixed pricing at settlement, with contracts closing between 2 cents lower and 9 higher despite the declines posted in both the Blocks and Barrels during the spot session.  The longer term outlook for the Class III market remains bearish, yet at these depressed values buy side hedging interests have been layering in protection as current pricing is attractive from a budget standpoint.  A resurgence in the spot cheese values would inspire a rally in the Class III values, though based on current fundamentals these gains would be minimal when compared to the steep price declines experience over the past month. 

Cheese futures continued the subdued price volatility as contracts settled between unchanged and 0.7 cents lower as over 500 contracts changed hands.  Dry whey futures settled between unchanged and 1.075 cents higher helping to cushion some of the declines of the Class III and cheese contracts.

We expect class III and cheese to open lower while whey will open slightly higher 

We had the privilege to participate in the USDEC Global Dairy Outlook 2016 call yesterday with panelists March Beck and Alan Levitt, and the main takeaway is some of the same ideas we have written about numerous times in the past.  While the dairy markets will remain sensitive to any significant supply/demand related news the glut of global dairy product supplies, particularly the powders, will keep prices subdued through at least the first six months of 2016.   

Milk production of the top five producing regions, EU-28, United States, New Zealand, Australia and Argentina continues to expand at roughly 2% per year yet global demand remains inadequate to offset this growth.  China and Russia are estimated to account for a reduction in demand over the past year totaling a milk equivalent of nearly 6.2 million tons.  The loss of these two major markets for exported goods has global producers fighting each other for the remaining market share of smaller importers, many of which has amassed significant stocks leading to diminished future demand.  Despite the lower current prices end-users are reluctant to increase their demand as the strength of the U.S. Dollar has raised the cost of imports from all sources around the world. 

Barring a major supply shock, the global dairy market will need time to work through the massive current inventories consisting mostly of powder products held around the world.  El Nino has yet to have a generated a material impact noticeable in New Zealand while Australia and Southeast Asia including India have experienced production declines.  While global milk production could pull back in 2016 the sheer size of the volume of stocks will take a significant amount of time to work through as global imports are unlikely to increase immensely without the participation of China and Russia.  

Spot Session Results


















DOWN 2 ½ 







UP 4 ¼












Class IV, Nonfat, and Butter Futures

Class IV futures spiked higher yesterday thanks in part to the GDT and spot induced strength of the NFDM and the scramble of nearby butter futures contracts to pull closer in line with a stagnant spot butter price.  Class IV futures settled between unchanged and 41 cents higher on the day on bids and nearly 50 total trades. 

The rally in the NFDM market was first triggered by the results of the GDT auction which saw increases in both the SMP and WMP values, up 3.2% and 5.3% respectively.  The rise in the SMP lifted the approximate NFDM equivalent price to 92.28 cents, well above where nearby futures contracts had been trading prior to the report leading to the surge in buy side interest.  Adding to the bullish sentiment of the day the spot session resulted in a 4.25 cent gain in the Grade A NFDM.  When the dust settled after the active trading day the NFDM futures contracts settled unchanged to a limit 4.00 cents higher.  Those gains may be in jeopardy today as the CWAP for the week ending 11/27 posted a steep 6.56 cent decline to 77.03 while weekly sales were estimated to have fallen by 57.4% from the week prior to 4,870,536 pounds. 

The butter market looked once again to the spot session for some signs of life, yet were disappointed to see another day of inactivity.  The butter futures on the other hand surged higher in the nearby contracts in an effort to pull ever closer to the spot value of $2.900 as the December contract has begun pricing.  The butter contracts settled between 0.100 and 5.000 cents higher with the December through March contracts closing out with gains ranging from 2.575 and 5.00 cents. 

We expect NFDM to open lower and butter to open higher


Grains markets diverged in their price action as both the corn and soybeans moved higher while the wheat moved lower on the back of spec selling.  The December corn settling 2.00 cents higher to 367.00 while the March contract added 1.25 cents to close out at 373.75 on carryover bullish sentiment from The EPA’s announced ethanol mandate.  Though the initial reaction to the EPA’s increased mandate levels have provided underlying support to the corn market, the increased mandate levels and optimism of the EPA for future ethanol blend rates should be mitigated as current gasoline demand and price levels are unsupportive of theses lofty goals. 

Soybeans posted the greatest price volatility of the day as both the January and March contracts gained 8.25 cents on news of flooding in Southern Brazil which could lead to the need for the replanting or abandonment of acres.  Brazilian exports of beans in November were viewed as bullish as an estimated 1.44 MMT left their shores, down 1.15 MMT from October but up a massive 1.26 MMT year over year.  Funds were estimated to have bought 6,000 contracts on the day.

Wheat futures were unable to maintain early session gains as spec selling, funds thought to have shorted 4,000 contracts, pushed values into the red for the day.  The December contract shed 3.50 cents while the March contract slid 4.00 cents lower ahead of the U.S. winter wheat condition and progress report.  The winter wheat’s G/E rating increased by 2%to 55% in the final report until April of next year.

We look for corn and wheat to open lower, soybeans to open higher


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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