Morning Dairy Comments, 04/25/2016

Monday, April 25, 2016

General Market News

· Potential for interest rate hike this summer widens

· Chinese total domestic and foreign debt increased to record 237% of GDP in 1st quarter

· Saudi Arabia will unveil plan today to overhaul kingdom’s economy to reduce dependence on oil

· ADPI Annual Conference starts today



Class III & Cheese

Class III and cheese futures continued to push lower as the prospects of still increasing milk production during the heart of the spring flush led to the nearby months registering the largest declines of the trading session.  The Class III futures settled between 11 cents lower and 4 higher, with the small price gains registered in the deferred months.  The cheese futures settled 0.3 to 1.2 cents lower in the May through February 2016 contracts leaving the remaining months unchanged. 

Once the dairy markets had closed for the day the results of the Cold Storage Report for the month of March was released.  At first glance the results of the report could be construed as neutral for the markets as cheese production pushed inventories well above last year levels, yet failed to reach our expectations.  With total cheese inventories now 11.43% above last year’s levels and American cheese stocks 14.42% higher one would expect futures to continue tumbling lower to start the week.  Yet the magnitude of the selloff after the latest Milk Production Report may have accounted for the significant increase in cheese stocks ahead of the report.  While the Class III and cheese markets should remain bearish in the near term expect buy side interests to capitalize on recent weakness failing into the buy the rumor, sell the fact mentality; that this bearish results of the report have been largely accounted for prior to its release, and that the sell side may be exhausting after the rapid recent price declines.

We look for class III and cheese to open mostly lower, dry whey steady.


Spot Session Results




































Class IV, NFDM & Butter

The Class IV components traded in a mixed pattern ahead of the release of the Cold Storage Report as the NFDM posted strength to offset the general weakness of the butter market.  In the Class IV futures the August contract fell 20 cents lower while the remaining months settled between unchanged and 10 cents higher.  Some of the trading volume was derived from activity within the Class III/Class IV spread, which has benefitted from increased interest of late as the relative stability of the Class IV markets has created some arbitrage opportunities when aligned with the down draft of the Class III market. 

Butter futures traded mostly lower Friday with contracts settling between 1.050 cents lower and 0.175 higher as the spot butter price declined by a penny to $2.0300.  Butter futures had been trending lower since spiking to the April 11th highs as the larger than anticipated milk production results for March had shifted market sentiment away from the strength of domestic demand.  The Cold Storage Report for March released after the markets closed on Friday with results that failed to reach our expectations.  Butter stocks increased by just 3.43% from February yet sit at a resounding 32.14% higher level than last year.  Butter futures should start today’s session relatively steady, with the potential for minimal declines, as market participants will turn to the spot session for definitive direction to start the week. 

NFDM futures saw an active trading session with firming price action as contracts settled between unchanged and 1.450 cents higher.  Buy side interests within the spot session continue to motivate hedging interests to add coverage in the futures market, shaking off the still bearish fundamentals for the powders on a global scale.   

We look for NFDM to open steady, butter to open slightly lower.


Major losses were tallied across the grain markets, led lower by the soybeans as concerns relating to Argentina production subsided.  The May corn contract dropped 12.75 cents lower while the December contract fell 12.50 as quicker than average corn plantings in the Midwest, save the Upper Midwest hindered by rain, should see total plantings above the 25% average for this time of year.  Chinese imports of corn in March hit 575,000 MT though almost exclusively sourced from the Ukraine. Chinese official purchases have met their licensed quota for the season hampering any prospects of an increase in U.S. exports through the fall.  Funds were credited with selling an estimated 22,000 contracts on the day.

The soybean market bore the brunt of the selling pressure as the May contract fell 31.75 cents while the new crop November contract shed 15.50 cents.  The old crop, new crop spread attracted the focus of the sellers interests as weather conditions and concerns relating to Argentina improved.  Despite the drastic decline in value of late the November soybeans still generate a positive return versus cash costs for farmers which may draw acres away from corn in certain regions.  Funds were estimated to have sold 20,000 contracts on Friday.

Wheat values tumbled lower in kind with the corn and soybeans as the U.S. crop is still overpriced compared to international competitors.  U.S. exports are lagging the USDA estimate for the year and at current price levels will have a hard time improving their standing.  Weather conditions in the FSU are improving with the potential to boost yields.  In the U.S. weather conditions have turned so beneficial that the states of Kansas, Oklahoma and Texas are projecting yields well above year ago levels.  Funds were thought to have sold 16,000 contracts on the day.


We expected the corn and wheat markets to open steady to 2 cents lower with the soybeans down 3-7 cents.


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