Morning Dairy Comments, 02/05/2016

Friday, February 5, 2016

General Market News

· ANZ Bank New Zealand cuts payout forecast to $3.95/kg MS

· Job gains slow, wages rise and jobless rate falls

· Tyson Foods raises profit forecast on lower costs

· ECB’s Jazbec: Will act in March ‘if necessary’

· If Russia started a war in the Baltics, NATO would lose in 36 hours



Class III, Cheese and Dry Whey

Class III and cheese futures continued to track slightly higher Thursday as the path of least resistance is to the upside so far this week.  Trading volumes were moderately heavy with over 1,400 class III and over 700 cheese contracts changing hands as spot cheese continues to edge ever so slightly higher.  Dry whey futures, too, underpinned class III yesterday finishing unchanged to $0.900 higher thru December. 

The real story behind volume yesterday was where it occurred - nearly half of the class III trading volume transacted in 2017.  The January to December 2017 pack alone traded 23 times at $15.75 (down 1 on the day) accounting for 276 of the 659 contracts that traded in 2017. There has also been more option activity in 2017 this week.  Hedgers are looking out further as prices are both attractive to end-users from a historical perspective while also providing reasonable profit margins for most producers to start hedging programs.  But it’s not just hedge business - it also appears that speculators are willing to take positions out in 2017 as well.
While prices for both 2017 class III and cheese futures have fallen modestly over the past week, the 2016 contracts continue to bubble up.  The news is still widely bearish and good arguments could be made that global milk supplies (particularly out of Europe) and farmgate price announcements will continue to keep news headlines bearish for dairy.  However, from our perspective, we have divergent market signals right now. 

As we mentioned at the beginning of the week, some of the 2016 technical indicators we watch have turned more bullish over the past several weeks indicating market bottoming action. The firming price action is different from a typical “bear bounce” that comes on fast and fades just as quickly.  Milk prices are firming in a very slow and methodical way so far.  We’ve seen this temperament to the trade before and prices end up catching people off-guard, rising much more than expected over several weeks as opposed to several days.

For the week ending January 23, dairy cow slaughter under federal inspection was down 5.04%, at 62,200 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.6% lower than 2015 levels, with 239,700 head slaughtered.

We look for a mixed opening for Class III, Cheese and Dry Whey.

Spot Session Results


















UP 1 ½







UP 2 ½







UP 4 




*Open Interest changes reflective of January expiration 

Class IV, Nonfat, and Butter Futures

Ironically, the news for NFDM – like cheese – continues to be mostly bearish, but futures prices have spent the past week or so bottoming.  NFDM futures firmed again yesterday on good volume (over 500 contracts) as buyers – some profit-taking and some new buy orders – mix it up against light offers.  The sell-side has backed off over the past few days, but technical resistance levels ought to bring in some new selling today as the 20-day moving average lingers just above many 2016 contract months. 

The moving average is simply the average price of a commodity over a certain number of trading days.  It’s not indicative of price direction, but market participants (often speculators) use various moving averages as areas to watch in order make decisions. Traders will sell below the 20-day moving average, for example, using the 20-day average as a backstop. They will begin to cover those shorts – and even go long the market - if the market moves above the 20 moving average as the market is showing disrespect for “technical resistance” levels.  This is more art than science, but it’s worth watching as we approach resistance for NFDM.

Butter, on the other hand, wouldn’t know technical resistance if it landed on its face and started to wiggle. Butter futures rallied again yesterday as buyers seemed determined to cover Q2 contracts in particular.  As we’ve said before, there seems to be a lot of commercial buyers still looking for coverage on butter.  While the cheese guys we’re locking up $1.70-$1.75 for January to December 2016 (last year), the butter guys were waiting for the expected December decline.  All the historical data in the world was not enough to push butter prices below $2.00.  That will not always be the case.  But we may need more like 275 million lbs. in storage as opposed to 150 million lbs. before that happens. Nevertheless, bring on the ungraded butter because buyers want to own futures on the dips.

We expect butter to open mostly higher with mixed to firm action for NFDM and Class IV.
NZX Futures



Grains we’re mostly lower yesterday on exports sales numbers that failed to impress.  Corn and wheat weekly export sales fell largely within the range expected this week (corn on the lower end), but soybean exports dominated conversations. Soybean export sales fell well short of expectations—and short of even a net zero—at a net 1.6 million bushel cancellation on the week ending Jan 28. That was the earliest a net cancellation has occurred in the marketing year in 12 years.

Statistics Canada yesterday reported the country’s all-wheat stocks as of December 31 at 20.7 million tonnes, below the average 21.8 MMT estimate, and down 19% from last year to an eight-year low. Meanwhile, Canadian canola stocks came in at 12.1 MMT, above the 11.5 MMT trade guess, though still down 4% from last year and the smallest stockpile in three years.

We look for a choppy trade that ultimately looks poised for additional weakness to end this week. Next Tuesday’s slew of crop reports will likely stem and losses as position squaring ahead of those reports will likely underpin the grain markets.

We expect grains to open mixed this morning.

Weekly Export Sales for week ending 1-28-16


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