Morning Dairy Comments, 12/17/2015

Thursday, December 17, 2015

General Market News

· Federal Reserve hikes Key rate for first time since June 2006, signals 4 quarter-point increases in 2016.

· U.S. dollar rallies on heels of FOMC

· Omnibus Bill would repeal COOL, exclude GMO labeling preemption

· Crude Oil under continued pressure due to large inventories

· A $5.20/kg dairy payout will do thanks Santa



Class III, Cheese, and Whey

Spot cheese weakness led to another day of modest losses for class III and cheese markets Wednesday. Blocks and barrels both traded 4 loads a piece and finished at the exact same price: $1.4100. First half futures prices timidly drifted lower as if looking for some reason to pause and turn back towards unchanged. No such reason came and prices slugged into a rather unemotional, moderately busy 5-10 lower trading situation for class III, ½ to 1 lower for cheese.  Still, many nearby contracts are at or very near new contract lows. But the slowdown in volatility in the market at new contract lows begs the question: are the nearby futures running out of steam to the downside?

Viewed through the lens of present cheese fundamentals, we’d expect more fresh cheese and, ultimately, more price weakness on the exchange in coming weeks. Additionally, yesterday’s announcement by the Federal Reserve to raise its key rate by 25bp is bullish of the U.S. dollar, which ought to continue to be a headwind for U.S. dairy exports including cheese moving into 2016. 

But the ho-hum futures declines over the past two days may be foreshadowing seller exhaustion in the short-term.  If cheese continues to grind lower, we’d expect futures to follow suit as they have. But stability of any sort in spot just may ignite a pre-milk production report bear bounce.
The USDA will release their November Milk Production report after the markets close Friday.  We’re looking for milk production to rise by 0.1% in both U.S. and 23-state categories. We’re looking for cow numbers to shrink slightly while milk-per-cow is expected to increase marginally for the season. Trader focus will likely turn to the Western states and the health of their milk supply amid chatter of increased culling over the past month or so. But mostly excellent weather for the Midwest in November (and now in December) has played a solid role good production levels recently.
Speaking of good weather, often times when weather makes headlines it’s because of something negative.  Recently we’ve both read and written quite a bit about El Nino. But our vantage point, while well intentioned, might be a little one-sided.  In looking for all that could go wrong from El Nino, we neglected to consider what might go right - like the fact that it’s between 40 and 60 degrees from Illinois to New York here in December. First quarter GDP in both 2014 and 2015 was hampered by polar vortexes and miserable weather for much of the U.S.  So far it looks like the super-cold, GDP-altering weather will not be an excuse for people to stay home and not shop and dine early in 2016.  


Dry whey futures finished yesterday mixed, mostly lower on moderate volume of 61 contracts.  We look for a continued choppy trade for dry whey around the current level for today. The weekly AMS price pegged dry whey at $0.2425 up 0.007 cents from the prior week on over 6.5 million lbs. of volume. 

We expect class III, cheese and whey to open steady to slightly lower.

Spot Session Results











DOWN 2 ¾  







DOWN 2 ½ 







UP 1 







UP ¾




Class IV, Nonfat, and Butter Futures

The spot butter market was bid up ¾ to $2.07 ¾ with 12 trades changing hands, which helped spur another sharp rally for futures.  Q1 futures were bid up strongly yesterday and January futures specifically were bid limit up to $2.07.  Generally when a contract finished limit up, we can expect follow-thru to the upside.  But recent price action is highly volatile and we’ve entered into what we expect to be a very choppy trade around the $2.00 level for futures.  Concerns over California’s and the West’s milk production are still squarely on the minds of market participants, so any dips in futures prices will likely be met with commercial buy side interest.  Something less quantifiable is the domestic demand for fat as we go into 2016. The challenge for many food companies is the consumer’s perception towards the ingredients in their food. Having “cream” on the labeling is much more appealing to consumers vs more processed ingredients.

Spot nonfat was bid up 1 cent to 78 cents on 7 trades. There has been consistent selling pressure although buyers are still finding some value at these levels. The futures were mostly mixed yesterday on good volumes.  Class IV futures came alive yesterday with 274 contracts trading hands on the Globex platform.  With the exception of January (up 60 cents) and February (up 8 cents), the class IV market held steady Wednesday. 
The NDPSR was released yesterday showing a 2.4 cent rise to 80.23 cents on 19.8 mil pounds of volume. Overall most buyers are well covered at the moment, once we come back off of the holidays there may be more action. End users are looking at contracting for the full strip of 2016. The nonfat futures curve is still at a big premium. Although in some cases end users are still considering chipping away at 2016 as the prices still work very well for the budgets in most cases.

In yesterday’s comments we mentioned the recent Japanese tender and the price of 77 cents. The price was at lower levels than what we’ve recently seen on both GDT and EU weekly pricing, so we thought we would clarify. The price is likely lower due to the product being of lower grade or aged or both.  So while the price is still very low, so too was the product.

We expect NFDM to open lower, Butter steady to higher and Class IV mixed.

NZX Futures

The NZX futures trading was flat to lower overnight with a total of 525 tonnes trading. Jan and May traded 110 and 250 tonnes respectively both unchanged while Feb closed down $70 to $2450.

The NZX settlement prices still show a good premium compared to the last GDT where the NZX is currently showing a $165 to $235 premium over the equivalent period in the last GDT. This premium has however dropped considerably since the last GDT as the general market sentiment appears to be yet again under some renewed pressure.



U.S Dollar strength overnight is keeping a lid on the grain complex, which finished lower yesterday as Argentine President Macri letting the Argentine Peso “float”.  That combines with the elimination of corn and soybean export taxes earlier this week make Argentine grain much cheaper on the global market.

Russia and China signed agreements on grain quality control today, which Russia has said could open up the Chinese market for Russian wheat—and potentially other crops, including corn, soybeans, rapeseed, and rise, which were all included in the food safety documents.

The trade continues to watch forecasts in Brazil’s northern belt.  Rains are forecast for early next week and would reduce crop stress in certain areas if realized.  We’ll know a lot more about how the SA crop is shaping up in early January, but weather changes will continue to be a daily discussion as the trade otherwise generally winds down for the holidays.

We look for a slightly lower opening for the grain complex this morning.

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