Morning Dairy Report, 12/03/2015

Thursday, December 3, 2015

General Market News

  • ECB expands stimulus but at lower end of forecasts
  • U.S. Dollar Down Sharply
  • ConAgra Foods announces plans to separate into two independent public companies
  • France hit by first bird flu outbreak in eight years
  • South Korean cheese consumption has increased by more than a third in the last five years


Class III, Cheese, and Whey

Class III and cheese markets finished mixed yesterday as the divide between the East and the West milk production grows.  Discussions in the Midwest are focused on an abundance of milk for processing right now.  Discounts appear readily available.  But if a manufacturer is panicked about having too much here in Wisconsin, for example, the guy out in California has the opposite problem.  He’s wondering where the milk will come from over the next few months.  We shall see how this plays out over time, but right now the story is the same: we have a lot of milk in cheese producing regions of the U.S. and it continues to create a weaker tone to pricing.  Spot cheese prices have dipped so far this week, but we’d expect prices are only becoming more attractive to a buy side community that hasn’t yet closed their books on 2015.  Expect a good two-sided trade around recent ranges for cheese for now. 
Meanwhile, NFDM and butter spot markets closed higher yesterday.  This slight divergence of price direction between cheese and butter/powder lately seems to have dialed up some interest in trading the Class III/IV spread in Q1.  Over 160 Class III/IV spreads traded hands at or within 20 cents of EVEN (EVEN would be buying class III at one price and selling class IV at the same price or vice versa). 
The buyer of class III (seller of IV) is likely taking the stance that the story of milk production in this country remains the same as it has been for the better part of 2015 – a year when class III traded some $3-$4.00 over class IV with the exception of the last few months.  If the story hasn’t changed, then class III ought to price higher than IV.  The other side of the fence says class III ought to continue lower as the problem today lies with heavy inventories of cheese first and foremost and butter/powder secondarily.  We think the latter may be correct in the short-term as we don’t believe butter is falling this week. 

Volumes on cheese and class III yesterday were tied rather closely. Both contracts registered around 1,100 options changing hands and over 900 futures contracts.  While Open Interest differences between class III and cheese futures is rather small, the options are a different story.  And that story is changing as cheese options volume is growing fast and Open Interest is quickly making new records over the past several weeks.  The charts below are a few days old, but they show the point well.



Dry whey futures traded over 150 contracts yesterday in heavy trading volume for the first half of 2016.  In fact, all of the 152 of the 158 contracts that traded were transacted in the January-June timeframe.  The first half average is now pricing 27.7250 – a price level that is attracting a new wave of commercial buy side interest.  The overall trend, however, remains down for now but these levels are hard to argue with from a buyer perspective. 
January Weekly Dry Whey Chart


USDA-AMS’s Dairy Programs announced the November Class III milk price at $15.30/cwt., down 16 cents from last month and $6.64/cwt. lower than a year ago. The cheddar cheese price average was released at $1.6503/lb., 2.87 cents below last month and 48.02 cents below last year. The dry whey price average was up 0.32 cents to 23.41 cents per pound, but 40.24 cents below last year. The Class IV milk price was 46 cents higher at $16.89/cwt., but $1.32 less than a year ago. The butter price average of $2.7999/lb. was 22.65 cents above last month and 81.08 cents higher than last year. At 83.72 cents per pound, the nonfat dry milk price average was 5.79 cents below last month and 55.30 cents lower than last year.

Dairy Programs will announce the December Class III and IV milk prices on December 30, 2015.
We look for Class III, Cheese and Dry Whey to open steady a little higher this morning.

Spot Session Results











DOWN 3 ½  














UP 2







UP ½ 




Class IV, Nonfat, and Butter Futures

Butter futures continued higher yesterday as the price of spot butter tacked on another 0.50 to close at $2.9050.  This was first move for butter since the Monday before Thanksgiving and – to give some scope to this market – the highest price level since September 28 when the spot butter market closed at $3.05.  We expect more strength to butter before the widely expected collapse. 

NFDM futures sold off yesterday after a two day bounce to begin the month of December. Trading volume hit 389 contracts and, interestingly, open interest rose by nearly the same amount – 383 contracts. Price direction yesterday was lower and nearly all the trades were new positions.  Granted, although NFDM futures trading has grown significantly over the past 18-24 months, this is not the corn market or some other heavily traded contract.  So to see volume and open interest rise like this – while unusual – is likely more probable in a market like NFDM.  From that vantage point, we see it as bearish. 
Meanwhile, the spot price of NFDM has risen 7.5 cent since last Wednesday while the sentiment remains rather negative and CWAP pricing fell by over 6 cents to 77 cents during the week ending November 27.  Whether the price is 72 cents or 80 cents, the market is attracting new buyers. We don’t see this changing this week, but we do think it is symptomatic of a longer-term bottom being put in.  We look for a weaker tone to start today’s trade.

We expect NFDM to open lower and Butter to open steady/higher today.

From Our Office in Dublin
UK Milk Collections for October

The latest data released by Eurostat shows UK milk collections for October totalled 1.19mmt, unchanged on October of last year and also unchanged on September of this year. Cumulative UK collections for the year to date now total 12.62mmt, up 1.3% on the same point last year.

EU PSA and Intervention

PSA and Intervention figures released yesterday showed that it was another big week for SMP offered into intervention with 1,807 tonnes offered into the scheme last week, just 21 tonnes less than the previous week. the volume of butter offered into PSA last week totalled 770 tonnes, 121 tonnes more than the previous week. A combined 941 tonnes of SMP was offered into PSA last week, 520 tonnes of which was offered into the enhanced PSA scheme. 413 tonnes of cheese was offered into PSA last week, down 28 tonnes on the week. See today’s report for full details.

EEX Futures

It was a quiet day on the EEX yesterday as no volume traded on EEX yesterday.

NZX Futures

NZX trade saw higher prices overnight in the follow though of Tuesday’s higher GDT auction.  A total of 450 lots/tonnes traded, with the activity in Q1 and Q2 WMP, all moving higher. Q1 trading 165 lots with Jan and Mar trading 30 lots each up $50 and $25 and Feb trading 105 lots up $105. Apr-Jun traded 100 lots per month, up $25, $30 and $10 respectively.

Euro continues to weaken

As the likelihood of a US interest rate hike at the next Fed meeting in the middle of December becomes more certain, the Euro is close to revisiting the five year lows hit in early March.  The weak Euro has been a key in providing support for the EU dairy and making EU product competitive on the world market, helping to find homes for volumes that would traditionally been exported to Russia.

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