Morning Dairy Comments, 01/22/2016

Friday, January 22, 2016

General Market News

· Crude and US Stock futures higher this morning

· Iran preparing to restart oil shipments to Europe

· U.S. treasuries decline as low yields deterring investors

· FDA’s raw-milk cheese rules challenged



Class III, Cheese & Dry Whey 

A momentary period of calm has come over the class III and cheese futures markets the past day or two.  Both markets finished mixed on lighter trading volume yesterday even with block and barrel cheese offered modestly lower again.  The futures have taken enough out of the market for the time-being erasing most of last week’s gains this week.

Even if we haven’t seen the kind of stomach turning volatility as the crude oil market (which is up another buck this morning by the way) or the S&P, we in dairy can learn a thing or two from threads that bind all markets at one point or another: greed and fear. The latter has plagued most markets recently. It’s not fun, but it’s the natural cycle of things. And we must deal with that.

Although class III and cheese markets are down this week, the greed-fear meter for cheese is not going bonkers.  The spot market is relatively stable and futures have whittled away any excess fat (premium) and are running lean looking for the next bit of news. So the question we ask ourselves: is cheese vulnerable to the same type of panic stricken trade that crude, for example, is seeing right now? 

While there is no panic today and while we can offer several good reasons as to why cheese is not crude and agriculture as a whole will likely perform better than the likes of palladium or heating oil, our opinion is that the cheese market is still poised to go lower.
We’ll get a look at December milk production and inventory numbers this afternoon. Our year-over-year milk production gains are modest at best, but we have a lot of product.  That’s what we’re looking for again today.  We expect milk production to be up 0.4% and we look for cheese stocks to have finished 2015over 11% higher than December 2014. Although that type of news is largely expected and likely won’t induce panic, such news will likely continue to serve as a reason for cheese to remain vulnerable to downside pressures for the foreseeable future. 

Strong cull numbers last week showed dairy cow slaughter up 5.7%, at 68,500 head, compared with the same period the previous year. Year-to-date slaughter levels, however, are 0.9% lower than 2015 levels, with 112,000 head slaughtered.

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

Spot Session Results











DOWN 1  







DOWN ½  








3 ¼ 







UP ¾ 




Class IV, Butter & NFDM

The Class IV complex was pressured lower yesterday as the spot nonfat market fell 3.25 cents to 71 cents on 12 trades. Futures volume surged with 660 contracts changing hands as prices plunged to more than 6 cents lower in December 2016/January 2017.  Most of the weakness was seen in the second half of the year as traders used an axe instead of a pocket knife to whittle away premium. The fundamentals of this market have not changed. 
On Wednesday the quotes out of the Netherlands showed SMP prices dropped €20/ mt to €1,, Germany was down €25 to €1,635/mt, and France was flat at €1,660. All prices are below the current intervention prices of €1,698/mt or roughly 84 cents a lb. with today’s currency rates. With quotes going below the intervention levels we are now seeing much higher volumes clear into the intervention program.
There has also been increased volumes of SMP entering the EU’s Enhanced Private Storage program (>1 year) which is illustrated by the blue bars in the chart below. The majority of the Enhanced PSA volumes have been from the Netherlands. This product is generally spoken for as it was likely forward sold to an end user that can use powder in excess of 1 year old. The enhanced PSA subsidizes the storage costs by twice the amount of the standard program making it attractive to store powder.


The Dairy Market News Western Mostly NFDM price was unchanged from the previous week at 74.13 cents per pound. Last week’s CA Weighted Average price was 80.54 cents, up 0.13 cents from the previous week.
Butter futures ended their rout yesterday with a modest bounce on moderately heavy volume. Spot finished up ¾ of cent to $2.14 helping to stave off additional selling in futures and coaxing buyers to get slightly more aggressive intraday. Today’s cold storage report is widely anticipated as everyone is looking for higher stocks. Although it seems like any inventories out there now are largely committed. Butter churns have been active lately and are building inventories of bulk butter. Retailers are said to be eagerly negotiating their needs for the upcoming Easter in late March.
Perspectives are interesting and the snap shot perspective on butter futures open interest might be an inaccurate one. Butter futures open interest was at 6,077 contracts this time last year.  That’s 121.5 million lbs. of butter. Today, open interest for all butter contracts stands some 20% less at 4,842 contracts or about 96.8 million. It’s easy to write this off and say north of $2.00 there is less interest in locking up long-term pricing. A slight decrease in butter option open interest might even support this perspective.

A closer look, however, suggests that the needs of late have required alternative tools. OTC volume and open interest has increased markedly showing that amongst increasingly volatile markets hedgers are looking for more customized, flexible and credit friendly solutions. Keep in mind that when the exchange is locked limit the OTC market holds no such bounds.
When combined we see a relatively unchanged but firm level of cumulative activity which in our perspective is quite impressive given the high level of pricing for butter. This shows to us the buyers willingness to accept a new paradigm (at least for now) in butter pricing where it remains above all other dairy products because of a shift in domestic demand patterns where fat is once again in vogue.

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

NZX Futures

NZX futures traded lower again overnight. A total of 830 lots/tonnes were traded across WMP and SMP, all settling lower.



The rally in the corn market to start yesterday’s trading session was thwarted by midday as technical resistance and both fund and producer selling capped gains.  The soybean market suffered a similar fate as technical selling cut the price rally in half without any bullish news appearing to support the price action. 

Farm Futures magazine yesterday released results of their producer survey estimating 2016 U.S. corn plantings at 89.5 million acres, up from Informa’s latest 88.9 mln but still a million below the USDA baseline; bean acreage was seen at 82.2 mln ac, three million below Informa and 400k below the USDA.
We look for Corn to open 1-2 higher, Soybeans 5-7 higher and Wheat flat up 1.

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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