Morning Dairy Comments, 12/18/2015

Friday, December 18, 2015

General Market News

· GDT Oversight Board has been established

· Bank of Mexico raises interest rates

· Dollar down against yen after Bank of Japan’s surprise easing move

· Fonterra to sell its Australian yoghurt and dairy dessert business

· Darden Restaurants’ stock jumps after earnings increase, dividend hike



Class III, Cheese, and Whey

It looked as though class III and cheese futures were putting in a temporary bottom yesterday as heavier trading volumes returned and prices generally opened lower and closed higher. 1,531 class III and 1,022 cheese contracts exchanged hands and Open Interest rose by 454 and 347, respectively. 

Renewed trading volume helped spur on volume in dry whey as well with 167 contracts changing hands in that market yesterday.  We had expected stability in spot to potentially drive some short-covering ahead of this afternoon’s milk production report. While spot was steady yesterday, the fact that market Open Interest increased for both contracts tells us there was likely more to the bounce than simple short-covering.

Although many commercial buyers got an early start to budget programs this year, end-users are still actively squaring away pricing for next year at various levels.  On the other side, producers have been rather active over the past several weeks and remain on watch for agreeable levels to initiate additional hedge coverage throughout 2016.  But the nearby prices are not attractive to producers, so most of the selling up front appears to be of the speculative variety.  In fact, the largest increase in open interest came in the February and March class III, which looks as though some traders are rolling out of their January positions (buying back short January contracts) and selling new positions in February and/or March.

What does all this mean?  The overall trend remains down for class III and cheese.  Picking market bottoms before they happen is nearly impossible. For instance, yesterday’s strength was met with more nearby selling overnight (and new lows for February and March class III to boot).  But renewed trading volumes are likely showing some bottom-fishing activity. Throw in an uptick in spot cheese or neutral-to-bullish milk production figures on the situation and buying will likely pick up the pace as the trade rolls into holiday mode next week. 

We’re looking for milk production to rise by 0.1% in both U.S. and 23-state categories, which is likely more of a ‘neutral’ than ‘bullish’ number. The USDA would probably have to serve up a negative number for today’s report to spark any nervous buying. 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. 

Meanwhile, Dutch milk collections continue ahead of last season.  The latest figures released by Eurostat show Dutch milk collections for November are continuing at pace. Collections for Nov totaled 1.11mmt, up 13.8% on Nov 2014 and up 11.9% on the three year average. Cumulative collections for the year to date stand at 12.12mmt, up 6% on the same point last season.

For the week ending December 5, dairy cow slaughter under federal inspection was down 5.02%, at 58,700 head, compared with the same period the previous year. Year-to-date slaughter levels are 3.8% higher than 2014 levels, with 2,744,200 head slaughtered.

The Central Mostly Dry Whey powder price was up 0.50 cents from the previous week at 21.63 cents, while the Western Mostly price was 0.25 higher at 24.00 cents.

We expect Class III, Cheese to open lower and Dry Whey to open mixed.

Spot Session Results




































Class IV, Nonfat, and Butter Futures

It only took a couple months and a subscription to Xanax Weekly to see some semblance of normalcy to the butter market. This week spot butter and nearby futures have converged.  January is now 1.25 cents over spot and the futures market is coming alive again. 218 butter contracts traded thru December of 2016 as prices rose by as much as 3.00 cents. Spot was 1.25 cents lower yesterday, but we expect a good two-sided trade to ensue around current levels.

Class IV finished mixed Thursday as strength in butter was countered by fresh weakness in NFDM.  While Q1 futures contracts carve out fresh lows, Q2 contracts are now retesting their July lows, and the second half looks poised for more weakness in the coming days.  The buy side interest has slowed recently as prices have come under pressure. We’d expect a choppy trade around current levels today. 

The Dairy Market News Western Mostly NFDM price was up 0.87 cents from the previous week at 77.50 cents per pound. Last week’s CA Weighted Average price was 79.85 cents, up 4.97 cents from the previous week. The CME Grade A NFDM price is up 2.25 cents from last Friday at 78.00 cents. There were 15 trades.

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

NZX Futures

The NZX futures trading was flat to lower overnight with a total of 256 lots/tonnes trading, all of which traded on WMP. Feb16 traded 100 lots settling unchanged while Mar16 traded 16 lots settling down $60 at $2,500. Q2 traded 40 lots, 10 lots and 90 lots each settling down $180, down $80 and unchanged respectively.



Yesterday’s grain trade was a good lesson in the currency/commodity price conundrum.  Many analysts will consider currency valuation as the main driver to a fault. Yes, currency valuation has a tremendous impact on commodity purchases and sales. But yesterday’s grain markets gave us a quick glimpse that raw supply/demand fear and greed are still king when it comes to commodities.

Export sales were lousy yesterday, the U.S. dollar skyrocketed, and the trade watched the Argentinian Peso collapse. A recipe for lower grain prices one would think. Except the trade ignored all that and late in the day focused on South American weather maps, which had turned drier.  Near contract low prices turned and became a 4-5 cent higher settlement for corn and 11 cents higher for soybeans. Funds were big buyers. But we also see end-users as scale in buyers lately too. And the average farmer – he’s Christmas shopping for his grandkids today or shoring up something in a barn somewhere. He’s not an active seller recently. All this leads to a firming price dynamic as we head in to the last full week of the year.

Soybean meal was likely the most impressive move yesterday. New contract low/key reversal – volume was not great but getting a bit of a confirmation this morning.  A higher close today is bullish.

We look for a steady to higher opening for the grain complex this morning.

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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