Morning Dairy Comments, 01/26/2016

Tuesday, January 26, 2016

General Market News

· Sprint said to cut 2,500 jobs, 7% of workforce

· EU to extend border checks amid refugee crisis

· Oil drops as Saudis to maintain investment spending, China Diesel use falls

· Connie Tipton, the president and CEO of the International Dairy Foods Association (IDFA), announced that she will retire at the end of this year.



Class III and Cheese

Class III futures continued their grind lower yesterday as most of the industry gathers at the IDFA conference in Phoenix. In addition to being a logistical problem for many East Coast dairy farms, winter storm Jonas has held captive many East Coast dairy industry folks who would have attended this year’s IDFA.

The market has had a chance to digest Friday’s cold storage report in which American cheese stocks up 12% over last December and Other Cheese stocks were up14% and there was little impact. Spot was steady with no activity. Dairy Market News reports cheese makers in the Midwest are not very concerned with building inventories right now. Cheese makers out west are more cautious with building inventories. Domestic demand remains healthy both from retail and restaurants.
Yesterday McDonald’s Q4 same store sales showed an increase of 5.7% mostly due to their all day breakfast menu. McDonald’s has also recently offered a 2 for 2 value meal. In this low cost commodity environment other players are taking advantage. Wendy’s released a 4 for $4 deal and Burger King recently released a 5 for $4 deal. Main theme here is there will likely be some stiff competition this year for promotions. The Super Bowl is just around the corner and the pizzerias both big and small will be sure to promote.

The domestic demand in 2015 was the story that kept cheese trading range bound from $1.50 to $1.75. Will this demand continue to keep the US market insulated from global pressures? The chart below illustrates the cold storage numbers from the past 7 years. We have not seen cheese stocks grow at such a high pace since 2009. This could be explained by how sharp the drawdowns were in 2014 with record high cheese prices. At the end of the day we will be facing more supply as exports slow down. Cheese exports are down 14% over the Jan-Nov 2015 period or down 108 million pounds.


We expect a mixed open for Class III, Cheese and Dry Whey this morning.

Spot Session Results




































Class IV, Nonfat, and Butter Futures

The Class IV market edged lower in sympathy with another lower day in Nonfat Dry Milk land. Spot nonfat dropped ½ a cent to 70 ½ on 10 trades. Not much to report here besides traders continuing to chip away at the carry on the forward curve.  For example, the March-June NFDM futures spread is at a 5.75 cent carry now compared to a 13 cent carry a week ago. Algeria’s tender is ongoing but the market is clearly unimpressed. Rumor has it there’s a 20-30,000mt cargo of SMP bound for Venezuela is sitting in the harbor as the seller is not getting paid.

Butter fell ½ a cent to $2.165 in the spot market on 2 trades. Butter futures started the day soft after Friday’s cold storage numbers coming in up 46% from Dec 2015. The bulls kept running as bids came to the market later in the afternoon. Overall the panic buying has calmed down from 2 weeks ago but the uncertainty is keeping pressure on anyone short the futures market.


We expect Butter to open slightly higher, NFDM and Class IV to open mixed.


Grain markets remain in search of a story and while yesterday’s chatter of Russia possibly looking to restrict grain exports isn’t the “mover” or the “shaker” that traders are looking for, it’ll have to do for the time being. The rumor was enough to prompt a round of fund short covering, which boosted wheat 6 cents higher and dragged both corn and beans along for the ride.  Soybeans tacked on about a nickel and corn managed to post fractional gains.
The issue at hand is a possible shortfall in India’s wheat crop, which has had dryness issues and a shortfall could possibly have ramifications if Black Sea wheat becomes limited. However, the world is in no danger of running out of it as the U.S. and Europe has ample supplies, so we would think this rally could be short lived. Also on the mind of traders is China’s continued push towards free-market reforms, which could have impacts down the road if they so choose to reduce subsidies and let the free market determine prices, which would likely further limit corn imports. 
As we turn to our neighbors to the south, rains continue in northern areas of Brazil’s crop belt, but they are expected to shift back to drier southern areas as we turn the calendar. Good rains fell in Argentina over the weekend, although a quarter of its grain belt is seeing mounting crop stress.

From the technical front, all three were able to claw their way north of their 50 day moving averages (ex. red line on the corn chart below), which could lead to additional upside in the coming sessions if funds want to reduce their short exposure to the market.  The trade will first have to shake off any notion of a “turn around Tuesday”, which has been a difficult task of late.

We look for a modestly lower opening for Corn, Soybeans and Wheat markets this morning.

March 2016 Corn Futures:



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