Morning Dairy Comments, 02/04/2016

Thursday, February 4, 2016

· U.S. dollar down again this morning

· 12 Pacific nations sign trade pact; ratification battle looms

· Wal-Mart to operate its own gas stations

· Domino's Adds Amazon Echo Ordering Ahead of Super Bowl

· Dunkin’ beats estimates; same store sales dip 0.8%

· Chinese New Year: Why many will travel home for good



Class III and Cheese

Look out below, and we’re not referring to Class III and cheese for a change! We’re referring to the U.S. dollar (USD) and to call yesterday’s action a downdraft would be a drastic understatement as it plummeted nearly 2% intraday, breaking through trend line support and areas of technical interest before finally finding some traction at its 200 day moving average (black line on the chart below).
It’s not often that we lead with an external factor like this, but it’s important on a couple of fronts. One being that if it becomes a trend reversal for the USD, it’ll eventually have a supportive impact to dairy prices, as a weaker greenback is supportive to exports and as we’re all aware, that is an arena in desperate need of a lifeline. A soft dollar will also provide support to the commodity space at large, which has been beaten down of late as money managers have bailed on the sector, sending the CRB Index to multiyear lows. The second reason a trend reversal in the USD is important is that it’s a reflection of U.S. economic sentiment and Fed policy, which was the impetus for yesterday’s selloff as dovish comments were made regarding future interest rate hikes in 2016. Now you’ve even got big Ben suggesting the Fed should entertain negative interest rates (think Japan here) should economic developments warrant such action.

All things considered, yesterday’s price action in Class III and cheese was likely not a direct result of the crashing USD, but more a function of a stagnant spot market which has been stuck in the mid-$1.40’s for going on two weeks now. That has translated to relative equilibrium in the futures market, with Class III content to hold about a 50 cent premium to the spot equivalent, which comes in at $13.38. Futures have been reluctant to stray much from current levels and rightfully so with the probability of a nickel move in either direction about as good as flipping a coin at this juncture. That said, where we go from here in the short term will be more of a function of spot movement and not so much the where the USD goes. Longer term it’ll be a function of both so the situation with the greenback does bear monitoring.

For the week ending January 30th, the National Dairy Products Sales Report showed a higher block price of 1.50 on decreased sales volume of 12,173,490 million pounds. Barrels slipped to 1.54 on steady sales volume of 10,360,803 million pounds, while dry whey moved fractionally higher, to 0.2381 on sharply higher sales volume of 9,547,256 million pounds.

USD~Daily Chart


The December Dairy Products Report was released yesterday afternoon with output mostly lower versus expectations.  American cheese production returned to positive territory after a one month hiatus while production of other cheese was in positive territory for the eleventh time in twelve months this year. Total cheese production is on a 33-month streak of gains. December production posted a 1.2% year-over-year increase at 1,022.1 million pounds, which is 66.3 million pounds higher than the five-year average. American cheese production gained 0.7% to 397.4 million pounds, which was 18.3 million pounds above the five-year average. 2015 total cheese production was 2.4% above the previous year ago and American cheese production was 2.3% higher.

Butter production gained 4.3% to 177.1 million pounds, 11.4 million pounds above the five-year average. NFDM output was lower, down 10.3% to 147.05 million pounds. Skim milk powder (SMP) output was higher, up 5.1% to 45.4 million pounds. NFDM output was 0.1 million pounds above the five-year average, while SMP was 4.7 million pounds higher. Butter output for 2015 was down 0.4% from 2014 levels and NFDM output gained 2.8%, compared with the comparable period a year ago. SMP production in 2015 was 17.1% below 2014 levels.

USDA raised November butter output 0.5 million pounds, while NFDM output decreased 0.6 million pounds. USDA revised output of American cheese up 0.3 million pounds to 377.6 million pounds. Other cheese output was revised 17.9 million pounds higher, and total cheese output gained 18.3 million pounds to 993.97 million.


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

Spot Session Results











UP 1














UP 1 ½







UP 6 




Class IV, Nonfat, and Butter Futures

The real action was on the Class IV side as both butter and NFDM tracked to the upside with conviction. A whopping 17 spot loads of spot butter changed hands yesterday, likely the result of the grading change, on its way to a six cent gain with futures moving in tandem and showing strength through mid-2016 on decent volume. It feels as though the $2.10 area for spot will remain as support with futures running at a premium as a result of proactive buy side interest. What it comes down to is that a $2.20-$2.30 butter price is more attractive than one with a $3 handle on it, a direct result of the psychological impact back to back record pricing years have had on the trade.

NFDM also put up an impressive showing as futures tacked on 2 ½ - 3 ½ cent gains through 2016 on solid volume. The market is attempting to not only take back some of the lost ground over the past few sessions, but also carve out an area of baseline support to possibly stage rallies off of. With the spot price putting the brakes on recent slippage, the $0.70 area has proven to be support and the impetus for futures to track to the upside and considering the scale of destruction in the futures forward curve, there is room for considerable retracement higher. It's doubtful that the bull is ready to storm the scene long term, but a correction is overdue and could possibly permit said bull an overdue trot.

For the week ending January 30th, the National Dairy Products Sales Report reflected a higher butter price of 2.15, on decreased sales volume of 3,596,687 million pounds. NFDM came in a bit higher at 0.77 on increased sales volume of 14,009,565 million pounds.

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

NZX futures traded a total of 790 lots/tonnes overnight, most of which traded on WMP, where most months settled higher for the session. Mar16 traded 260 lots, settling lower at $1,850. Q2 traded 150, 100 and 125 lots per month settling up $20 at 1,850, up $30 at $1,880 and up $100 at $2,050. Jul16 traded a further 150 lots settling up $115 at $2,165. The remaining five lots traded on NZX overnight traded on Feb16 butter which settled at $2,900.



Grains continue to trade sideways in back and forth fashion, up one day and down the next without much fresh fundamental news to move on other than fund money flows.  South American weather and their ensuing harvest and a fast approaching acreage battle, which at this point looks to be more like a grade school dust up than an outright fight as in years past. We’ll need to see the ratio between corn and beans widen out from the current level of 2.26:1 in order for a major shift to occur. Beans finished a dime in the red which dragged on corn, which pulled back from 2 month highs and finished a penny lower yesterday on the heels of slowing demand in the weekly ethanol report, which saw production down 2,000 barrels per day to 959.

The FAO’s world food price index fell from 153.4 points in December to 150.4 points in January, down 16% from January 2015 and a near seven-year low. The agency raised their 2015 world cereal output estimate slightly to 2.531 billion tonnes, though that’s still just over one percent below the 2014 crop.

Moving forward, we continue to look for the point where money managers come back to the sector, which becomes more of a plausible scenario with every downdraft in with stocks, but we are not there yet. The trade would like to see a strong round of export sales this morning, which could provide some upside fuel to move on. 

February 9 Crop Report Estimates:


We expect grains to open modestly higher across the board.

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