Early Morning Update, 01/25/2016

Monday, January 25, 2016

General Market News

· Investors have pulled $24 billion from equity funds in the first three weeks of the year

· OPEC oil production was down 130,000 barrels a day in December vs. November

· Crude oil was up 9% on Friday to a two week high

· Russian GDP down 3.7%

· German business sentiment near 12 month low, coming in at 107.3 vs. expectations for 108.5

· Arla cuts UK milk prices:

· Fonterra sees more pain for dairy farmers before price revival:



Class III, Cheese & Dry Whey 

Friday’s session was quite interesting for the class III market as we finished the day mixed but mostly higher despite a spot cheese price decline of a penny for the blocks and 6 cents for the barrel. The large price decline for the barrel corrected the block barrel spread which had been inverted. Settlements ranged from -3 to +10 on the day and it’s hard to call the class III market price movement anything but surprising given that the spot equivalent would equate to an approximate class III price of $13.45 but futures are holding from $13.72-$13.78 for Jan-March. We tend to believe the market is hesitant to break on class III with all the volatility in butter but if that eases to start the week we’d look for class III prices to likely come under some pressure early this week as a combination of weaker spot pricing and the fear edge being taken off the butter market likely allows for futures prices to slide nearer the current spot equivalent. For the week the April to June pack average lost 40 cents to $14.28.

Technically the market is sending mixed signals as the nearby months appear to have a bullish formation while the deferred contracts continue to look bearish. You can see in the chart below that despite falling last week the February contract held support levels. However the April to June pack chart shows us continuing to hold below the bearish trend line.

February class III daily chart-


April to June class III pack average chart:


Cheese futures finished out the week mixed but mostly lower with settlements from -0.001 to +0.003 Jan to May and steady to 0.006 from there through the end of 2016. On the week the April to June pack was down 4.13 cents to $1.5620. It’s hard to see the market being able to start the week firmer given the bearish milk production report and cold storage reports, both included below.

The whey market finished the week mixed from -0.050 to +0.450 on the day as volumes have been relatively light of late with little in the way of fresh news but the market looking to make a bottom in the low 20’s. The April to June pack average was actually higher last week by 0.3583 cents settling at 23.92.

We expect Class III, Cheese and Dry Whey to open steady to slightly lower after a quiet overnight session. 

Milk Production Report

The November 2016 milk production report was released today and it was bearish in comparison to expectations.

On the surface a 0.7% increase is nothing to write home about. In fact, 0.7% is still a little light by trend-line use standards – dairy demand tends to grow by 1.5-2.0% per year. Under different circumstances, 0.7 could

easily fit in a “bullish” category. But today’s report is just another in a long list of milk production reports in

which the USDA revises prior month milk production and cow numbers higher.

This time the USDA says November production was actually 29 million lbs. higher than previously reported.

They also added 8,000 cows to the November number, which is quite large, compared to the 1-2,000 cows

they’ve added for the past several months.

The moral of the story is that report revisions that show more milk or more cows are bearish unless something

cancels them out. Nothing is cancelling those revisions out in this report. And it’s for those revisions and

ultimately what they mean that we’re calling today’s report bearish. Not simply that the milk production came

in 0.3 percent higher than we expected.

The other continued pattern in milk production reports over the past year is that milk production losses

continue to be contained to mostly Western states. New to the list this month was Arizona was down 2.26%

from last year. In total, 7 of the 23 states showed milk production declines in December as we continue to see

milk-per-cow losses register in places like New Mexico and California, which posted the largest losses of 6.17

and 3.03 percent, respectively.

Meanwhile the same story of strong Midwest production gains forgiving the sins of the western states losses

continues to satisfy the market. From a percentage standpoint, South Dakota led the pack up 12.97% with

Wisconsin and Michigan following with increases of 4.82 and 2.78, respectively.

For better or worse, the report looks a lot like many of the reports we’ve seen in 2015. While that may make it

uneventful, we see the main issue is that dairy farm profit margins have not compressed enough to make a

material change to the milk production story in the country. And because of that, we ought to expect more of

the same from this report. Price probably won’t collapse Sunday night – but it’s not bullish.


Spot Session Results











DOWN 1  







DOWN 6  














UP 3 





Class IV, Butter & NFDM

VOLATILE! One word to sum up the butter markets last week and this week looks like we’re going to open to more of the same after a very bearish cold storage report after the close Friday, report included below. We settled at a limit move twice last week Tuesday it came with expanded limits of 10 cents to the downside while Friday’s session settled limit up, 5.00 cents in February, at 224.025 meaning we will have expanded limits today once again of 10 cents. For the week the February contract was down 11 cents. The April to June pack average was down even further falling 15.816 cents to $2.19742. We’re very curious to see when this market will settle down but with IDFA this week and next Monday the first day product offered on the CME spot market will not have to be AA graded it feels like these big swings could continue. Our feeling is that some of the upside has been taken off and some of the fear factor likely removed with the change as well as the stocks levels from the Cold Storage Report.

NFDM futures and options were extremely active during Friday’s session with nearly 300 futures trades and 1,000 options trades taking place. The volume was very well distributed throughout the 2016 futures contracts as the carry in the marketplace continues to erode rapidly. Settlements from Jan through March were steady to -0.750 lower with April through December down 0.975 to 2.825 cents on the day. As the fear of NZ drought continues to ease and we get further into 2016 in regards to booking forward sales its getting more difficult to see a sharp recovery for powder prices given the milk production levels in the US and EU and lack of significant demand to offset that excess product. That led to a decline across the board but a steeper decline on the deferred contracts. Last week we saw the Feb contract shed 2.95 cents to 76.150 cents while the April to June pack was down a whopping 10.017 cents to finish at 80.625. We’d think the sharp correction seen on the forward curve last week is likely to slow this week but may not be over as of yet. With the Arla, Open Country Dairy and a potential Fonterra price cut announcement there is little to get us over excited about the potential for a bounce in spot and without that futures will likely have to continue to move lower.

We’d look for the class IV market gains of late week to get erased early this week on the heels of the bearish cold storage report. The chart was jumping all over the place last week as the April to June pack saw declines of 54 cents Tuesday, 60 cents Wednesday, 15 cents Thursday before rallying back 6 cents on Friday. Ultimately that meant we were down $1.23 on the week to $14.31. The big volatility here saw sharp corrections in the class III vs. IV spreads as well A week ago they were mostly favoring the class IV market by 20 to 80 cents while this week it is mixed from 30 cents toward class IV to 70 cents favoring class III later in 2016.

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

Cold Storage Report

The December 2015 cold storage report was released today and it was very bearish in comparison to expectations for butter and neutral for cheese.

A major surprise on the year ending stock number for butter today! We came in at a massive 152.9 million pounds over a 20 million pound increase from November vs. our expectations for stocks to fall to 127.2 million pounds. December tends to be a bit of a swing month for stocks and this increase will almost certainly have a bearish influence on prices when we open up Sunday night. The increase may in part be due to the increased milk supply vs. expectations for December as well. Add in the fact that DMN has reported that cream is flowing into the churns for product moving into storage and we might just have enough product to get through the Easter holiday without another big price spike.

Cheese stocks were mostly in line with expectations today as American cheese was 700.7 million pounds vs. expectations for 700.4. Total cheese stocks were slightly below expectations at 1.146 million pounds vs. 1.152 expected. Generally we see a larger increase in cheese stocks during the month of December leading to our higher expectations. Though stocks were slightly short of our expectations taking a quick look at the charts below shows stock levels comfortably above each of the past 4 years and due to that it is hard to see this report having any significant impact on futures come Sunday night unless there is some spill over from the butter market.


NZX Futures

NZX futures continue to trade mostly lower as the most recent GDT auction continues to weigh upon futures. For the week WMP futures were down 130 to $2,070, SMP futures were down 70 to $1,870, AMF traded 50 lower to $3,650 and butter futures were down 300 to $3,300. With the weather maps continuing to show improvement in moisture conditions as you can see below as well as rains forecast for early this week for the south island trouble spot it appears drought concerns continue to be for naught. This should mean milk production levels hold steady for now. It also wouldn’t be a surprise to see Fonterra lower their forecasted pay out at some point this week after NZ’s second largest co-op Open Country Dairy did so last week to a range of $4.00-$4.30 per kg/ms vs. the current $4.60 projection from Fonterra. It will be interesting to see if any bullishness in regard to the International markets can be found this week at IDFA.

clip_image009 clip_image010



The grain markets had an interesting session on Friday as soybeans rallied sharply early in the day only to settle near their lows, down 2 cents at $8.7640. The corn market meanwhile traded a tight range but settled near the highs, up 3.25 cents at $3.7025. The corn chart below has yet to run into resistance and the large fund short position seemingly continues to push this market to the upside. As you can see we continue to hold above the short term MA’s and look as though we may be able to test the 100 day MA as well as multi month highs in the $3.79-$3.82 range in the near future. Soybeans on the other hand have struggled to break through and hold above their 100 day MA and Friday seemed to be more confirmation that the market needs something to sustain us above that MA. Fundamental data will continue to be a little slow in the coming weeks up until the SA harvest gets rolling and we get the initial S & D tables for 2016/2017 crop in mid to late Feb likely leaving the market to lean upon technicals for short term price direction.

March corn Daily chart:


March soybean daily chart:


We look for Corn to open 1 to 3 lower, Soybeans 1to 3 lower and Wheat 2 to 4higher. .


New Zealand December Milk collection

Data from DCANZ puts New Zealand milk solid collections for December down just 1.19% year on year, vs 2.15% in November and 2.72% in October. December was an exceptionally dry and sunny month, with rainfall for the majority of the NI <50% of normal and the south Island 50-79% of normal. This puts the season from Jun-Dec down 2.6% year on year and would require Jan-May to be down 11% for the full season to be down the previously forecast 6%. January has seen good rainfall to date with the majority of the NI and the northern half of the SI seeing rainfall significantly above normal, bringing soil moisture for northern SI above normal and bringing the main dairy areas of the NI closer to normal. More rainfall is forecast over the next few days, which should help bring NI soil moisture close to normal for this time of year.

EEX Futures

Friday saw further good volume on EEX with a total of 275 lots (1,375 tonnes) trading, consisting of 125 lots (625 tonnes) of butter and 150 lots (750 tonnes) of SMP. Feb16 and Mar16 butter traded 10 lots and 15 lots each, both settling lower. Q2 traded five, five and 10 lots per month, all settling higher. Q3 meanwhile traded 30, 30 and 20 lots per month with mixed price activity. All SMP traded on Friday settled lower for the day. Feb16 traded 5 lots while Q2 traded five, 10 and 10 lots per month. Q3 saw the majority of the SMP volume with 40 lots trading per month.

Friday’s volume made it the joint third largest day for EEX dairy futures, equalling the volume traded on January 13th, a little over a week earlier and sees 2016 getting off to a very good start. The total volume of product traded on EEX last week came to 431 lots (2,155 tonnes), consisting of 285 lots (1,290 tonnes) of butter and 173 lots (865 tonnes) of SMP.

NZX Futures

NZX futures settled lower overnight with 221 lots/tonnes trading, all of which traded on WMP. All traded activity took place on Q3, with Jul16 trading 121 lots settling down $20 at $2,440, Aug16 trading 50 lots settling down $30 at $2,460 and Sept16 trading 50 lots settling down $110 at $2,490.

US Milk Collections for December

The latest data released by USDA late last week showed US milk collection in December totalled 7.91 million tonnes, up 0.7% on December 2014, and 2.7% ahead of the three year average for December. Cumulative collections for the 2015 calendar year totalled 94.57 million tonnes, up 1.2% on last year. For full details, see report attached.

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.

Market Intelligence Free Trial

Meet the Team

Kansas City, MO
1251 NW Briarcliff Parkway
Suite 800
Kansas City, MO 64116
Tel:+1 (816) 410-5079



Our privacy policy has changed. View our privacy policy to learn more.