Morning Dairy Comments, 04/22/2016

Friday, April 22, 2016

General Market News

· ***Cold Storage report today***

· All-day breakfast, promotion drive McDonald’s to higher than expected quarterly sales and profit

· PBOC injects near record amount to avert cash squeeze

· Japanese Yen tumbles on renewed rate cut talk, Dollar stronger

· China Dairy Corporation lists on Australian Securities Exchange



Class III & Cheese

In the past 48 hours, the trade has given up nearly a month’s worth of milk price gains. Nearby class III and cheese values collapsed Thursday amid fresh selling inspired by a bearish milk production report and aggressive selling during the spot call. Nearby dry whey prices also fell sharply on heavier volume (153 contracts) adding weight to the already weaker session.

Trading volumes spiked and open interest increased as prices fell early and never really recovered. Over 1,800 class III futures changed hands and 600 cheese as the pressure was on early and it never really let up. Option activity too was brisk with over 1,100 class III options trading. Overnight there was a little follow-through to the downside, but we expect a two-sided trade this morning.

Yesterday’s action fits the rather bearish narrative for the dairy complex these days, but there are conflicting stories. The weight of good production and months of building inventories is squarely in the bearish column. On the other hand, domestic demand is great and outside markets are still a wild card. This could make for a good two-sided trade around current levels. The buy side is certainly willing to step in during the spot call where 3 loads of block cheese and 11 loads of barrels traded yesterday. But the difference this time around is that the recent price bounces on spot have been minimal by comparison to upticks in price earlier this year. That is a pattern shift worth noting as the sell side seems more active at current levels as opposed to letting the price come up a bit before selling.

Producers did a good job of stepping back in and selling some second half production over the past week. There was likely some fresh producer selling yesterday, but with the second half averaging $14.80, we’d expect a slowdown in farm selling out there unless spot cheese breaks below $1.40.
With three months of $13 milk under our belt, producers have become somewhat acclimated to current price levels. It’s great and there are undoubtedly on-farm losses, but at least feed was cheaper. That changed this month with the barn-burning rally in the grain complex. Although we think that rally is overdone for now and although prices are actually coming down this morning, it has had a psychological impact on many producers who are coming to the realization that margins may not improve and - in fact – could get worse before they get better. We don’t think producers will cull more because of this, but we do expect a swift change in the ration. This could hinder milk-per-cow just ahead of the hot season.

While dairy cow culling was running a little stronger than normal in February, its back below the 5-year average producers want to keep the stalls full.


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

Spot Session Results











DOWN 1 ¾  







DOWN 2 ½ 







UP ¼  











Class IV, NFDM & Butter

The Class IV market segment took a deferred position in trading yesterday as market participants shifted their focus to mainly the Class III and cheese markets.  NFDM futures maintained their choppy, sideways trading pattern of the previous few months with just over 100 registered trades leading to settlement prices ranging from 0.725 cents lower and 0.250 higher.  Open interest increased by just 4 contracts on the day reinforcing the idea that this market seems content to maintain its current trading pattern. 

Butter futures pushed mostly lower despite the steady performance during the spot session as the stronger than anticipated milk production revealed Wednesday has inspired thoughts that the upcoming Cold Storage report could show that butter production has risen to a level that quells demand enough to warrant a move down towards the $2.00.  With 108 contracts changing hands on the day, with open interest increasing by 48, we could see another sell side driven performance today ahead of the market close and release of the Cold Storage Report this afternoon at 2 pm Central time.

We look for NFDM, Butter and Class IV to open mixed.


Thursday’s corn trade seemed to come to its senses and close lower on profit taking. After rallying most of April, the $4.00 level was hit and failed on heavy farm and fund selling. Old crop soybeans and soymeal were focused on continued crop concerns in Argentina.

Over the past few days we’ve fielded a lot of calls about the validity of the soybean really and whether or not this is just some ploy by speculators to inject some market volatility. There is likely not just one answer to this, but from our vantage point there is cause for legitimate concern and has caused what appears to be an illegitimate rally.
Many Brazilian farmers are self-financed and that leads to questions of how well their second crop corn planting will go (and first crop beans later this year). Then we add in the persistent rains in Argentina and the wiggle room for the Brazilian guys to get their crops planted shrinks a little. That focuses the world on US crop development. If all is well here, we get more wiggle room for South America. Discussions here, however, have turned to La Nina and her hot, dry, crop killing weather potential for the Midwestern US. Will it happen? Maybe – Maybe not. But that domino effect of “what ifs” causes speculators to move markets faster and, in many cases, farther than they should go.


Corn export sales continued to run strong at 47.4 million bushels this week, up from 44.7 mbu the week prior and 34.1 mbu on the same week last year. Cumulative sales since September 1 have reached 1375 mbu, now less than 180 mbu behind last year’s pace; that compares to a –335 mbu deficit just ten weeks ago, meaning cumulative sales have made up over 150 mbu vs LY since early Feb.


Corn is called 4 to 6 lower, Soybeans are called 10-20 lower and whey is called 10-14 lower.



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