Morning Dairy Comments, 01/04/2016

Monday, January 4, 2016

Spot Markets End 2015 with a Firm Tone
Block and barrel cheese both extended last week’s gains Thursday to finished above $1.50 – and more
than 10 cents off their 2015 low - to end the year. Aggressive bids from multiple buyers absorbed 8
loads of block cheese and 5 loads of barrels as prices finished up 5 and 5.75, respectively. There’s end of
the year window dressing and there’s need-based spot activity. Most people seemed to think this
strength was window dressing, but to us it looks more like need based buying. There is legitimate
demand for cheese. We think much of that demand can be met with cheese in the country but we know
that doesn’t prevent sourcing from the exchange where applicable. So we closed out 2015 on a strong
note for spot cheese – what about futures?

Class III and cheese largely ignored the spot situation last Thursday for a few reasons. Futures have
already built in enough premium, so the strength in spot on New Year’s Eve really only served to close
the spot/futures spread. Also, as stated before, there is the common presumption that the spot
strength is end of the year “window dressing”. When the trade doesn’t believe in something you know
because the prices don’t respond. Thin futures volume around the year end was likely also at play.
This is not to say, however, that class III and cheese futures will not rally this week as we’re starting this
morning on a firm note. From our vantage point, expect more strength to start the year especially as
uncertainty around NM and TX milk cow/production losses due to last week’s storm “Goliath” gets
dialed up. We can then debate how long it will last.

Spot butter tacked on another 1.50 cents to finish last week but the futures buyers – who are largely
commercial in nature - don’t seem bothered by a spot market that’s sitting south of $2.10. They’re
taking a hard-lined, shoot first-ask questions later attitude to the futures market right now that has
engulfed contracts clear out into Q3 (Jan-Sept butter futures are all north of $2.10 now).
We know demand is strong and we expect more upside to start the week, but the mid-2016 butter
market has moved too far for its own good in our estimation. We lay blame, in part, on diminished
volumes during the shortened-holiday week. If we’re going to make another run at $2.20 or $2.30, we
need to see the spot market – not the April or June contract – to do the heavy lifting. Right now, spot
closed the year at a relatively comfortable – but balmy - $2.08. Nearby futures this morning are mixed
with January down slightly and February up limit (5.00 cents).

NFDM finished the year on a mixed, mostly higher note as mid-2016 contracts flowed to positive
territory. Spot NFDM finished up 0.50 to $1.7550, but the market seems balanced in the mid-70 cent
range for now. Not much to read into prices here as the trade remained largely range-bound during the
final week of trading for 2015.

Dry whey futures, which moved higher during most of last week, stalled out on light trading
Thursday. There is likely more price risk to the upside on Dry Whey than the downside – but for now
there is not much reason to advance higher at the moment. The market is still saturated prices will
likely struggle to move higher from current levels.

The New Zealand Exchange (NZX) was closed on January 4th. We will get the first round of GDT auction
prices for 2015 on January 5. We expect those prices to be largely stable to slightly higher.
Grains are called to open slightly lower this morning. The US dollar is also lower, but worries over China
weakness seem to be figuring into the grain trade. The Shanghai Composite imploded overnight with
trading halted a couple of times closing down nearly 7% - bigger thing is the move in the yuan –it looks
like now they have a reason for another devaluation, which will make imports more expensive.

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