Morning Dairy Comments, 01/13/2016

Wednesday, January 13, 2016

General Market News

· A Powerball win tonight would make you #1,250 on the Forbes richest list (before taxes too)

· Iran has released the 10 U.S. sailors it had detained in Persian Gulf

· 1/3 of oil companies could go bankrupt

· China oil import jump 9.3% in Dec

· China exports see biggest decline since 2009 but still better than expectations

· European stocks rally on stability in Chinese markets and supportive data

· S. Korea fired warning shots over border to the North



Ground Control Dairy World

Ground control to major milk

Ground control to major milk

Take your protein pills and push your price down

Ground control to major milk (ten, nine, eight, seven, six)

Commencing countdown dryers on (five, four, three)

Check ignition may God’s love be with you (two, one, liftoff)

This is ground control to major milk

You’ve really made the extra grade

And the papers want to know to which country you’ll sell

Now it’s time to ship it if you dare

I’ve never known a life without David Bowie, great music and great memories made with it playing.

I’ve also never known a dairy world with powder below 80 cents; cheese in the 1.40’s and probably headed to the 1.30’s but butter above 2.00. It doesn’t make any more sense than some of lyrics to some great music- I am the walrus…

Perhaps butter is supporting cheese at this moment. It’s been ages since we had a forward carry market in butter futures and yet that’s what has suddenly emerged. It’s what manufactures need to be able to make and store butter at these nose bleed levels without wetting a bed. Spot at 2.035 and futures ranging from 2.07 to 2.10 not so far off is the start of contrary to fundamental sense suggests bear spreads are the way to go. Tacking on premium at these levels in deferreds is somewhat illogical to some but exactly what the market is telling us. Sometimes you just don’t fight the trend.

CWAP moved up 2.1% to 0.841/lb. from 0.7872 on a light sales volume of 5,443,499 lbs. this with chatter of EU SMP around 68 cents/lb. might be nothing short of amazing or unsustainable. With the USD strength, Chinese currency weakness, weak oil prices and demand uncertainty from many major oil backed economies there is little reason to forecast any major price turn around in the next 3-6 months.

The argument I’ve heard from those who see the tale of two halves in 2016 is that Chinese buying will drastically reemerge in 2nd half 2016 as U.S. and perhaps global milk production eases as a result of sustained on farm losses. It’s a good argument; I just don’t see it playing out that way.

The Chinese buying that caused major global price highs was a panic or fear based buying. Unless there is another outlier event it won’t materialize again anytime soon. Melamine hits, cow disease, political change and boom, but without it there is no sight of panic, no smell of fear.

EU milk production continues to be strong, NZ milk production is coming in lower than scary expectations thrust forward many months ago (as we expected), U.S. milk production is firm. As bad as the damage done to areas such as TX and NM is, and we feel for those producers and their animals, it isn’t enough to shake things up here now and 22 months down the line when those calves would be impactful is when the brunt of the damage will be felt to our markets, and by then most will have forgotten about it. Lastly, Chinese milk production is firm as well and they have the luxury or producing for their own needs or dumping and buying cheaper imports; they can trade dairy rather than procure it and this is something scary to the world’s largest dairy exporters.

Pile on top of the production side a strong U.S. dollar weakening buying power of foreign nations (most globally traded dairy is done in U.S. dollars) and an easing policy in China, Europe and elsewhere and you have reason to believe demand will be sluggish for bulk of the year unless it’s done at what’s seen as discount prices.

Milk producers don’t cut production inside of 6 months, they didn’t do it in 2008/2009 when losses were their worst and it’s difficult to find reason to believe they’ll do it any faster in 2016. It may be time to brace for the long road ahead. And while January will be the first month that essentially every U.S. producer will be losing based on their milk check, those that hedged and some off the nation’s largest herds are very well hedged, aren’t going to be losing money.

Now, given that some people sold these class III prices for early 2016 at $17+ and we are trading in the upper $14’s there is reason to cover, there is reason to protect. There is reason to bounce. And there is reason to reinitiate short positons on such an opportunity should it be afforded. We could slide away to the abyss but more likely we’ll chop around in a low price range for a period of considerable length dying the death of a 1,000 cuts rather than a swift chop. We are bears anticipating we are in a bounce opportunity believing the worst of the declines are behind us but seeing no reason for a runaway bull to emerge. This has been very well depicted in the NFDM futures where premium in the deferred contracts has just eroded and keeps ticking away a little bit almost every day.

Slip sliding away, slip sliding away

You know the nearer your destination

The more you’re slip sliding away

I know a man he came from my home town

He wore his love for his markets like a thorny crown

He said Delores I live in fear my bias for you is so overpowering

I’m afraid that I will disappear

We expect Class III and cheese to open firm, whey soft. NFDM steady, butter firm

We expect the Class IV complex to open mixed with butter steady to higher and NFDM lower.

Spot Session Results











UP 3 







DWN 1 ¼  







UP ¼  













The UDSA quarterly stocks report didn’t hold any major surprises during yesterday’s session but the final production estimates for 2015 sure did. In the table below you can see how significant of cuts UDSA made to the yields for corn and soybeans this year. While the ending carryout for corn increased this certainly had a bullish influence on the soybean market where stocks were down by 25 million bushels from last month’s estimate. It was soybeans that led the rally yesterday closing up 13.25 cents in March at $8.7450. This close puts soybeans above the major short term moving averages but as you’ll see in the chart below we did fail intra-day at the 100 day MA. Corn finished the day up 5 cents at 3.5675 but unlike soybeans you’ll note on the December 2016 contract we remain below most all of the short/medium term MA’s. We have to question how much the market will buy into these cuts in production from USDA in the coming days as it could easily be shaken off as just a miscalculation of product being stored on farm. Taking a look at the state by state breakdown we tend to believe that to be the case but only time will tell. The next few sessions will be key from a technical perspective.




We look for a soft opening in the grain complex 

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