Morning Dairy Comments, 05/04/2016

Wednesday, May 4, 2016

General  Market News

· Crude oil holds around $45 as wildfires limit Canadian oil sands production

· Ottawa vows “long-term solution” to rising U.S. imports of milk protein

· Emerging markets face downgrades as debt cliff nears

· Producers Dairy expands their operation

· Donald Trump becomes presumptive nominee



Class III & Cheese

Class III and cheese futures continued to erode to the downside Tuesday as the market focused on weaker spot pricing. Block cheese dropped to $1.3375 during the spot call but finished at $1.3400, the lowest level since December 30, 2010. But it wasn’t the spot session alone that brought selling clear into 2017.  Negative sentiment around milk fundamentals continues to permeate discussions and with grain markets under pressure yesterday, that sentiment is weighing on the markets. Even a slight uptick in GDT cheddar price (up 1.8% to $1.2368) was ignored as class III and cheese futures carved out new contract lows through August 2016.

To add insult to injury for those hopeful of higher prices, trading volumes spiked yesterday. Over 2,200 class III and over 900 cheese contracts changed hands with open interest rising materially in both. Generally that would be indicative of further price weakness, but be careful. History is riddled with both market tops - and bottoms - marked by spikes in volume and open interest when participants stop waiting, throw up their hands and just get into the market.
Although the action of late seems more calculated than that and therefore less “bottom like”, it is worth noting that the only thing in short supply today is hope of prices recovering. And when the market sentiment is tilted too far in any one direction, there is generally a corrective move for prices that follow.

The milk trucks are full, the coolers are full, and the market participant is full of reasons prices should continue to move lower, but we’d be remiss if we didn’t mention that our prices are likely becoming attractive on the world stage today. The US Dollar is down 6% over the past two months alone. During the same time, block cheese has fallen from $1.52 to $1.34 (down 11.9%), proving that there is more to commodity prices that currency valuations. But with cheese exports in the dog house this year, it’s easy to overlook the impact of currency on commodities in general and cheese in particular. We think this will become a bigger story over the next few months as the US Dollar weakness is just beginning in our book.


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

Spot Session Results

























Up ¼   







DOWN 3 ½  




Class IV, NFDM & Butter

The Class IV futures succumb to the inherent weakness of the component markets to fall precipitously lower after the spot sessions as the June through December contracts settled 6 to 38 cents lower.  With an estimated 130 contracts trading this move lower deserves recognition as the overt weakness of the butter market over the past two sessions has conjured images of a potential sharp, extended decline like that which has driven the Class III complex lower over the last two weeks as fundamentally this market has enjoyed an overdue reprieve from a necessary correction.

The butter futures put in a second consecutive trading session with extensive declines as the May through March 2017 contracts settled between 2.750 and 5.500 cents lower, aided in their decent by the combination of weakness seen within the GDT auction then again during the spot session.  As over 250 trades occurred traders were left to rationalize the recent resilience of a market that has seen stocks increase dramatically year over year while demand has fallen well short of offsetting the surplus inventory.  Will the butter market finally break the $2.00 threshold?  Based on the supply on hand, one would think so, but buy side hedgers are still leery of repeat of last year’s monumental rally that took values close to $3.00, and will view this recent decline in value as a great opportunity to add coverage as summer approaches. 

NFDM futures were able to mitigate a portion of the early session losses tallied after the results of the GDT auction were announced, yet settlement prices ranged from 0.300 and 1.275 cents lower on the day as just over 300 contracts changed hands.  The all-contract SMP price dropped 3.6% lower during the event while the all-contract WMP mustered a gain of 0.7% to ignite the sell-side’s foray into the market.  The ¼ cent gain registered during the spot session was the day’s saving grace, motivating buy side hedge interests to step in an effort to capitalize on the early declines. 

The CWAP for the week ending 4/29 posted yesterday revealing a week over week decline in price of 2.05 cents (2.8%) to 71.44 cents, 25.2% lower than during the same period last year.  Weekly sales were estimated to have increased by 93.5% from the week prior to 20,375,111 pounds, 35.9% higher than during the same week in 2015. 

We look for a mixed opening on Class IV, NFDM and a slightly firmer opening for Butter.



The grain markets erased early supportive price action, giving way to extensive losses across the complex as wheat led contracts lower.  The corn futures shed 9.50 to 12.00 cents as accommodating weather forecasts for the Corn Belt will accelerate plantings which as of Monday were running 15% ahead of last year’s completion rate.  The new crop corn/soybean ratio continues to widen reflective of a marketplace that is buying into the USDA’s planted acreage estimate for corn as fewer acres are expected to shift to soybeans.  Funds were credited with selling 20,000 contracts on the day as much needed rains have been forecast for 2/3 of the Brazilian Safrinha corn crop region. 

The soybean futures collapsed, settling 10.00 to 14.00 cents lower, after attempting another early session rally as weather improvements in Argentina will allow farmers to get back into the fields to continue their harvest as fields dry out.  The potential yield losses due to the recent deluge of rains remain murky and could lead to additional weather premium injected into the new crop contracts in the future.  Brazilian soybean producers stepped in as sellers on the recent rally as prices in terms of the Real have hit an all-time high thanks to the weakness in their currency, highlighted in the chart below.  Funds were estimated to have sold 12,000 contracts throughout the day to capture profits. 


The wheat market bore the brunt of the bears’ selling pressure as contracts dropped nearly 17 cents for the day as funds sold 9,000 contracts.  Robust yields, rumored to be as much as 15-20 bushels per acre higher than last year, have been mentioned out of the wheat tour making its way through Kansas sparking the bearish push.  The Australian wheat belt has received some much needed rains, enough to eliminate much of the concern surrounding dryness in the region.  HRS wheat plantings in the U.S. were reported Monday to have reached 54% completion, well above the 39% average for this time of year.   

Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

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