Morning Dairy Comments, 02/01/2016

Monday, February 1, 2016

General Market News



Class III and Cheese

Class III and cheese futures ended January on a firm note, in light of spot pricing that showed a reluctance to move.  Although trading volumes were light – just 585 class III and 335 cheese contracts changed hands – prices were looking up on the heels of what was a rather quiet IDFA Dairy Forum in Phoenix last week.   Some will say that Friday’s end of the month trade lifted all U.S. markets from crude to gold, and milk got caught up in the “buy American” sentiment as Asian economic woes mount and Japan pushed their interest rates into negative territory.
If we were just to focus on dairy, we’d defer to sentiment at IDFA. Granted, market moving news was rather light from that meeting, but we couldn’t find many cheese market bulls there.  The main takeaway was a widely held expectation that cheese would kind of trade around $1.40-$1.50 for the first half of the year - a fairly simple, straightforward, and benign forecast. 

We know better than to expect anything “simple” and “straightforward” from the complexities of the global dairy trade.  But perhaps domestic demand will remain strong enough to absorb not only the lack of cheese export as well as fresh imports.  Perhaps prices will hang out in the $1.40’s, maybe low $1.50’s for the next several months.  From a fundamental perspective, we’d make the argument that cheese prices ought to fall below $1.40 to reinvigorate the export side of the equation, chip away at large inventories. 

On the flip side, several technical indicators for both class III and cheese are showing signs of bottoming.  For one example, take the weekly July Class III chart below.  The key to this chart is looking at what is referred to as “Candlesticks”.  Without going into a long description of Candlestick trading, a system of reading price action developed by Japanese rice traders during the 17th Century, we’ve circled a particular Candlestick called an “inverted hammer”.   The inverted hammer illustrates that a market has made attempts at going lower, but for whatever reason finished the day, week or month near the high of the range.  It’s not 100% certain, but such a formation typically indicates a market bottom.

If you’re skeptical, just take a look at the recent weekly inverted hammer on May corn.  That inverted hammer preceded three weeks of higher closes in a market plagued by bearish news.

So while the news remains largely bearish for class III and cheese, there are some signs of bottoming action on the charts.  If this is to last for any great length of time, we will ultimately need to hear some bullish fundamental news.  But for now, we have our eye on the technical patterns as they tend to move ahead of the news. We expect a mixed opening for class III and cheese.

Dry whey finished the week on a slightly firm note as well, but on dismal volume.  Just 7 contracts traded Friday as prices edged higher but stayed largely within their recent, narrow trading range.  We expect more of a mixed trade for dry whey to begin the month of February.
The midpoint Central dry whey mostly price was up 1 cent from the previous week, at 23.25 cents.  In January, the Central dry whey mostly price averaged 22.51 cents, 30.54 cents lower than January 2015’s price but up 1.23 cents from December. During the month, the dry whey price was up 1.87 cents at 23.25 cents.

The midpoint Western dry whey mostly price was 25 cents per pound, up 1 cent from the previous week.  January’s Western dry whey mostly price averaged 24.26 cents per pound, 22.89 cents below 2015 but 0.36 cents higher than December. The dry whey price ended the month up 1 cent from the end of the previous month at 25 cents.

Spot Session Results




































Class IV, Nonfat, and Butter Futures

While the class III moved higher to end the month, the class IV side of the ledger seemed to reflect sentiments of IDFA more succinctly.  NFDM futures reversed a sharp mid-week rally trading to new low prices in many months to close out January.  Chatter at IDFA was for spot NFDM to trade back below 70 cents – 65 cents was a number heard several times. 
Overall, spot NFDM price was up 0.75 cents on the week to settle at 71.75 cents per pound, with 24 trades last week. January’s monthly average Grade A price at the CME was 73.12 cents per pound. Trading totaled 65 loads during the month, up 9 loads from 2015 and 20 loads higher than last month. Traded prices ranged between $0.7000/lb. and $0.7575/lb.
Meanwhile, many market participants are still perplexed by butter’s surge north of $2.20 last week.  The firming price action brought sellers to the market and butter finished 2 cents off its high of $2.24 Friday.  Futures finished mixed on moderately heavy volume.  We look for a mixed trade to start the week.  We would expect some additional price weakness in a nod to the historic day ahead of us: the first day non-graded butter can be brought to the exchange.

January’s monthly average butter price at the CME was $2.1214/lb. The price is 55 cents per pound above 2015, but 21.04 cents lower than last month. During the month, the butter price gained 14 cents to $2.2200/lb. Activity, at 54 loads, was mixed: down 16 loads from last month but 28 loads more than in 2015. Traded prices ranged between $2.0300/lb. and $2.2500/lb.

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

It was a quiet session on the NZX Futures market overnight with no trade. With the first GDT auction of February taking place tomorrow, the market seems to be taking a pause.



Grains finished last week higher, led to the upside by strength in the bean market, which lent sympathy support to both corn and wheat. The fact that beans were able to shrug off news of Chinese cancellations on Thursday and a 1,000+ point rally in the U.S. dollar was rather impressive, possibly feeding off of the rebound in stocks and crude oil as well.  That said the picture remains largely bearish overall for the complex as global stocks are adequate and a slowing Chinese economy weighs on the trade.
Also big news last week was that China now intends to let the market set price in an effort to steer away from subsidies of the past and rely more on their domestic stockpiles, which account for roughly half of global inventories. We would expect a negative impact on exports as a result in an already struggling arena, which likely limits upside price potential.
The CFTC reported in the latest Commitment of Traders (COT) report that reflected fund short covering in the latest reporting period of more than 70,000 contracts. It’ll be interesting to see if that number is revised in the coming reporting periods, as there wasn’t much of an uptick in volume that would’ve suggested such action was transpiring.

As we turn the calendar to a fresh month, the trade will remain vigilant of South American weather as well as any upside follow through in crude oil, which has been the dominating theme in the commodity space for weeks now.  

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