Morning Dairy Comments, 05/19/2016

Thursday, May 19, 2016

General Market News

· Bayer in Talks With Monsanto Over Mega-Merger

· Prospect of early U.S. interest rate hike boosts Dollar

· Oil prices tumble on dollar strength, jump in U.S. inventories

· Fonterra dairy products put at risk by storage temperature at Hamilton factory



Class III & Cheese

Despite a positive spot call that saw blocks + 3 ½ cents ($1.315/lb.) and barrels +1 ¼ cents ($1.3625) Class III futures settled mostly lower yesterday. The abundance cheese that was brought the spot market over 3 weeks ago is still on the minds of traders and speculators alike. With production and cold storage numbers running strong, the volume traded on the spot market is just the tip of the iceberg. The recent downturn in price funneled reports of a significant uptick in aged cheese sales. On the fresh side of things, weekly NPDSR sales for blocks were at their highest levels since the end of July last year; at 14.34 million lbs. Barrels sales however, came in right along the 2015/16 weekly average at 15.11 million lbs.

What is interesting to note is the cash markets rejection of lower spot cheese prices, conveyed through the NASS/CME Spot spread. The graph below shows the spread between NASS and CME spot, block and barrel cheese with a 1 week delay.


We have tested the 9 cent NASS premium to spot before, and what has happened in the past was that the spot market rallied to close the gap. Perhaps that rally began yesterday for spot, but consecutive higher closes are needed in order to get in line with $1.40/lb. price level on NASS; and to convince futures we have found a bottom. Markets tend to overreact, and that seems to be the case with mid $1.20/lb. cheese. If cheese producers were able to clear up inventory space at these lower price levels, coupled with strong fresh cheese sales, we very well may see an uptick in pricing.

Is it safe yet?

The quick answer is that yes – yes, yes, yes – it is incredibly safe for good quality US milk production today! Weather is cool and near perfect in many milk sheds. Our expectation is that April milk production will be up 1.8%, but some are thinking +2% and we can’t argue with erring on the high side. In the dairy markets, however, we seem to forget year in and year out that after a cool spring the inevitable is going to happen. That is, SUMMER IS COMING. Game of Throne reference aside, weather premium that is being built into the grain complex is really not affecting dairy markets today. Good milking weather, schools letting out over the next month and the resulting dumping of excess milk is taking center stage domestically today. But when the heat of summer is in full swing, stressed cows is the talk of the town.

We look for Class III and Cheese to open mixed and Dry Whey steady to higher.

Spot Session Results


















UP 2







DOWN 3      











Class IV, NFDM & Butter

There was quite a bite of trading activity in Class IV futures yesterday, most of which was seen on the Class III/IV spread. The inverse between the July futures widened to $1.24, making a contact high. That spread will eventually correct itself, but what component will lead the charge. The best bet would be for a stabilization in cheese prices, coupled with a weaker NFDM market.

NFDM futures and spot both finished higher yesterday, spot settling at $0.80/lbs. Buy side follow through was seen after a higher GDT earlier this week, conveyed by strong volumes for the second day in a row. With CWAP still in the low 70s, 80 cent spot doesn’t seem right. Out of all the dairy commodities, NFDM may be the most fundamentally bearish. You have NZ who is switching production from WMP to SMP, which may have been the driver in the recent run up in lactose prices. The EU and their mountain of intervention inventory. A dollar that has been on a tear the past 2 weeks, and may get stronger with a potential rate hike in June, and a melamine-less China. Not to mention NFDM/SMP is the least expensive dairy commodity to store; and has a long shelve life.

NDPSR reported sales volume of butter last week at 3.02 mil lbs., down significantly from where we were in mid- April at 5.5 million lbs. NFDM volume was also down, coming in at 20 mil lbs. for the week ending May 14th.

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


Soybeans were unable to hold onto their 11 month high, closing lower Wednesday. Corn was able to pose marginal gains on the news that the EPA was increasing the renewable fuels mandate. However, a bearish ethanol production report kept a lid on the rally.
Not much of that matters this morning as grains – and energies – are under pressure across the board on both overbought technical conditions and renewed US dollar strength. A hawkish interpretation of the Fed Minutes released Wednesday, sent the dollar higher. A possible rate hike in June will only continue the strength seen in the dollar. Right now, futures are pricing in a 30% chance of a rate hike in June.
Grain exports for the week ending 5/12/16 were mixed. Corn was right in-between expectation for both old and new crop. Soybeans were just under the now range of estimates for both old and new crop. Technical for old crop corn and beans still remain bullish, despite a softer overnight trade. 

The rain action is in the southern Plains this morning, moving out eastward into the weekend; Midwest-centered rains are on the way for later into the weekend into next week. Extended maps generally remain warm and wet.


We look for Corn to open 4-6 lower and soybeans 10-15 lower.

Quick note on jobless claims

U.S. jobless claims sank 16,000 to 278,000, after posting gains for 3 straight weeks. The 20,000 claim increase during the first week of May was thought to be in part of the new Law in New York that allows school bus drivers and cafeteria workers to file for unemployment during spring break.
Claims are still slightly above year ago levels, but total Americans collecting benefits have decreased by 13,000 to 2.15 mil, the week ending May 7.  

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