Morning Dairy Comments, 04/06/2016

Wednesday, April 6, 2016

General Market News

· NZX launching milk price futures and options contract next month

· Pfizer, Allergan terminate $160 billion merger after U.S. move to block inversions

· Crude oil rallies on U.S. inventory reduction, comments from Kuwait and Russia on potential production freeze

· Traders look to today’s fed meeting minutes release for direction



Class III & Cheese

Class III/cheese futures opened quietly lower yesterday waiting for direction from the spot market and the Dairy Products report. Spot offered very little direction as the blocks had no activity and barrels ticked ½ cent lower on 2 trades. Markets adjusted slightly lower following but maintained a rather mixed trade on light volume.

The February Dairy Products report came out yesterday and looks bearish for cheese, although we don’t expect a big market response from these numbers. Total cheese production is on a 35-month streak of gains. February production posted a 4.04% year-over-year increase at 956.2 million pounds, which is 105.04 million pounds higher than the five-year average. American cheese production gained 1.2% to 368.2 million pounds, which was 26.1 million pounds above the five-year average. Year to date, total cheese production is 3.3% above the comparable period a year ago on a daily basis, and American cheese production is 1.1% higher on a daily basis.
Interesting to note Mozzarella production was up 6.25% YoY. California showed a significant increase in Mozzarella production up 10.5% while simultaneously showing a 26.1 % reduction in cheddar.  To give you an idea of the impact of California on the Mozzarella market we saw US production for February come in at just over 341 million pounds. California produced 37% or 127.8 million pounds.

Whey production fell by 7.25% on a daily average basis to a reported 74.564 million pounds. In keeping with a semblance of balance, dry whey inventories also reportedly declined by more than 9% (9.60%), but volumes still stand at 75.787 million pounds – well above the February 5-year average of just over 54 million lbs.

The class III and cheese markets have been rather resilient in the face of bearish news and we’re not expecting much different following yesterday’s report. We’ve been expecting weakness for spot cheese and the market remains remarkably stable. Over the past month, block cheese has had a range of 7 cents ($1.52-$1.45). While such stability is not necessarily exciting, the more important aspect is that the market continues to hold in there amid a barrage of negative news. We shall see if that can continue, but the longer it does the more the mid-$1.40’s look like a longer-term bottom. 

Class III and cheese to open mixed, dry whey steady

Spot Session Results
































UP 4 ¼




Class IV, NFDM & Butter

Tuesday markets finished mostly higher with only April Nonfat finishing in the red.  GDT index finished 2.1% higher with WMP +1.5%, SMP +1.5% and Butter -2%.  Butter and Nonfat rallied more aggressively after the spot session as the butter finished 4 ¼ cents higher driving futures to their intra-day highs.  Nonfat futures finished mostly higher with the 3rd quarter showing most of the strength as the market consolidates in light of steady spot and GDT pricing. 

The results of the Dairy Products report were bearish for Butter while neutral for Nonfat.  Butter production was pegged at 171.21 million pounds, up 4.2% from January on a daily average basis while 5.8% higher year over year.  Nonfat production came in at 144.9 million pounds well above our estimate of 137.1 as production increased by 13.02% from January, yet declined by 7.25% year over year, while inventories fell 4.4% lower from the month prior.  

CWAP was also released yesterday afternoon showing an increase in price from 75.11 ¢ to 76.34¢ but with nearly ½ the volume (13.18 mln and 7.68 mln respectively).

NFDM to open higher, butter lower with Class IV steady.



Corn finished slightly higher as recent price declines have brought U.S. corn to levels more competitive with world markets and should offer some underlying support as funds were credited with buying 6,000 contracts.  Wheat finished slightly lower in a tug of war between lost production in the southern plains and the value in relation to the rest of the world.  Winter kill questions have offered a bid in the market but our wheat price is still well above current world prices limiting any upside. 

Soybeans pushed nearly 9 cents lower on ideas that farmers will be switching from corn to soybeans because of planting delays in the Southeast and higher profitability of soybeans at current price levels.  China soybean demand has waned due to higher values which is cutting deeply into crush margins.  Expect continued volatility in the soybean market as we continue to work through these questions.

We expect wheat to open 4-7 cents lower, soybeans down 1-3 with corn steady to a penny lower.


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