Morning Dairy Comments, 12/21/2015

Monday, December 21, 2015

General Market News

· Export deal will boost dairy prices Fonterra says

· Australia’s free trade deal with China comes into force

· China reveals focus of its 2016 economic plan

· Brent crude oil falls to lowest level since 2004

· Hoping your rivals will die – The 2016 commodity story



Class III, Cheese, and Whey

It was a red week for the class III and cheese markets and for a while it looked as though Friday’s session would be much worse. We saw futures trade to as much as 27 lower ahead of the spot session where finally the market was given some bullish reprieve with the blocks gaining 3 cents while the barrels picked up 4 cents even the sizeable spot gains were not enough to turn the nearby months higher as settlements ranged from steady to 18 lower on the day. The biggest losses were held in Q1 which settled the week at $13.85 down 21 cents from the prior week. The January to March pack average chart included below is almost mechanical looking at this point we’ve more or less been locked in in a consistent down trend since mid-October. Which is interesting for last week in particular when you see the blocks were down just ½ a cent and the barrels were up 2.75 cents on the week.

Daily Class III Jan to March pack average:


Given what Friday’s milk production report held perhaps these declines are a bit more understandable as production well exceeded expectations and revisions continue to be to the upside. We’d expect trading to be relatively light this week unless something big happens today or tomorrow with the cold storage report, estimates included below, activity will likely be limited and die off as we get nearer the holiday and next week will once again be an interesting shortened week with New Year’s Day Friday.

Cheese futures much like class III saw price pressure throughout much of the week as the Jan to March pack finished down 2.03 cents at $1.5287. Whey also contributed to the class III declines though settlements were mixed on Friday from -1.00 to +0.275. The Jan to March pack settled the week at 24.075 cents down 1.122 cents from the prior week. Despite multi year lows on whey it’s still a struggle to find bullish indicators.

We expect class III, cheese and whey to open soft

Milk Production Report

The November 2015 milk production report was released today and it was bearish in comparison to expectations. Total US milk production came in at 16.643 billion pounds for the all US well above our expectation for 16.574 billion pounds. Milk per cow saw a very slight increase year over year coming in at 1,787 slightly above our expectations for 1,781. Cow numbers also exceeded our expectation coming in at 9.313 million vs. our expected 9.307 million. This month’s production easily exceeded our estimates and once again the revisions continue to show increased milk production from the initial estimates. The October milk production was revised higher by 30 million pounds which would have been a +0.3% result vs. the 0.1% we saw last month. Given the pressure we’ve seen on the spot markets of late this result fits that activity. Prices were softer early today but rallied from their lows when the spot markets moved higher. We’d expect that this result leads to some weakness and perhaps a retest of the lows from today come Sunday night/Monday morning.

The 23 state results were also above our expectations in particular the cow numbers was a surprise coming in at 8.635 million head some 5,000 higher than our expectations. Total production in the 23 states was 15.616 billion pounds vs. our expectation for 15.538. Interestingly the eastern/western state gains vs. losses weren’t quite as pronounced this month but the upper Midwest continues to show the largest gains. South Dakota milk production was up 13.1% this month, Michigan up 6.4%, Wisconsin up 4.3%, and Indiana up 4.1% were where we saw the largest increases. Weather in these states continues to run above normal seasonally and you’re already seeing stronger milk per cow as a result. We have to expect that trend to continue as a recent look at the weather reports showed 51 degrees for a Christmas day high in Chicago! California continues to show the largest year over year declines -4.4% as cow numbers are down and milk per cow is lower as well. Other states showing a decline include, New Mexico, -3.3%, Virginia, -2.1%, Texas, -1.7%, Kansas, -1.6%, Oregon, -1.5%, Utah, -1.1% and Washington, -0.4%.


Spot Session Results











UP 3







UP 4 







DOWN 1 ½












Class IV, Nonfat, and Butter Futures

The downside onslaught continued for the NFDM market on Friday as for the second straight day overnight activity had us sharply lower early on. It looked as though following the initial reaction to the bearish GDT event, details below, that the NFDM market was going to be resilient and it even bounced back a bit on Wednesday only for things to drop sharply both Thursday and Friday. Settlements on Friday ranged from steady to 3.975 cents lower from Feb through December 2016. On the week the Jan to March pack was down by 6.34 cents to 86.142. Most contracts lost 5 to 8 cents on the week. The spot market which bounced early in the week finished at 76.50 cents, down ¾ of a cent on the week and the market participants seemed to have an unending desire to sell the large carries available on the forward curve. We are certainly oversold on most contracts after Friday’s session so an oversold technical bounce can’t be ruled out but there are still attractive premiums on the nearby months so we could see a continued dip early this week.

The butter market acted like a magnet of the same pole against the NFDM market throughout the week as prices were weaker early in the week only to trade higher to close the week out. Settlements on Friday ranged from steady to 1.475 cents firmer and the Jan to March pack finished at 205.167 up 11.834 cents from the prior week. Technically the short term moving averages that were violated last week provided almost no resistance as the market moved back above them and suddenly last week looks like a head fake in a still bullish marketplace. As we approach the holidays we look for the butter market to take a wait and see approach for the first portion of 2016. There is a lot of cross currents coming as inventories must be rebuilt and we doubt processors want to do that at a $2+ market but the Easter holiday demand will be on us in no time and we will have to see how aggressive importers will be as the calendar changes.

The class IV futures finished the week lower following the NFDM market, settlements were steady to 47 lower on the day and we’ve seen an uptick in class IV volume in part this is due to the volatility we’ve seen in the class III vs. IV spread of late. Below is a screen shot of those settlements from Friday. The values that are reflected as negative are months where class IV is above class III.


We expect NFDM and butter to open steady





It was an interesting week for the grains as the big news of Argentina allowing their currency to float in addition to reducing export taxes on grains means another competitor in the already tough export markets was bearish but the technical undercurrents on soybeans in particular wouldn’t allow the market to finish the week lower. On Friday we saw corn finish up ¼ cent after rallying nicely back from March contract lows on Thursday. This meant we were up a paltry 1.5 cents despite seeing one of the widest trading ranges over the past four months on the week. The soybean and meal rallies on Friday however were much more interesting from a technical standpoint as you can see in the charts below sharp reversals from an oversold condition were seen and on Jan soybeans we even jumped above the 100 day MA. Many are already calling this a false breakout on the charts but action early this week will likely tell the story. For Friday Jan beans finished up 15.25 cents at $8.9275 a 21.5 cent gain for the week while soybean meal was up 5.1 to 281.0 which was a gain of 8.8 for the week.

Daily January soybeans:


Daily January soymeal:


We look for a higher opening to the grain complex today

Special note on Live & Feeder Cattle:

Friday afternoon we got the USDA cattle on feed report which was overwhelming bullish in both current cattle numbers as well as those placed on feed during the month of November as we were well below trade expectations. The live and feeder cattle markets were locked limit higher from the overnight session Thursday throughout the session Friday. Don’t expect the volatility to abate early this week as the market scrambles to digest this surprising report.



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