Morning Dairy Comments, 05/26/2016

Thursday, May 26, 2016

General Market News

· Fonterra forecasts $4.25 per kg of milk solids 2016/17 season

· Pizza Hut is experimenting with a robot cashier

· Lending in China is so risky that cows are now collateralized

· Most US states have strong economy

· Venezuela sells gold reserves as economy worsens

There is still time to register for our 13th Annual Dairy Outlook Conference in Chicago on June 16th. Please see the agenda at the link below.



Class III & Cheese

With a lack of fresh news, the trade looked to the spot market yesterday for direction and was left wanting as the cash session opened and closed with no activity. Futures reacted by closing mostly slightly lower on moderate volume.

Recent firmness in the whey market has some producers focusing more on the cheese component; looking for class III price appreciation coming less from the cheese side and more from the whey side.  As mentioned yesterday the mountain of cheese in cold storage is a known data point the futures have largely priced in at this time.

You wouldn’t know that milk margins were squeezed in April by looking at the monthly slaughter rates.  Cull rates in April dropped seasonally, but more steeply than the 5 year average.  Rates dropped 10.5% from last month and 6.5% from last year.  Perhaps some producers dried off some animals in April due to the seasonally we expect rates to fall in May and June and increase as we get into the heat of the summer. 


Last week’s milk production report showed cow inventories continue to climb. 


We have a lot of young productive cows that will continue to come to age; and even when we see cull rates seasonally increase in June this will only serve to reduce the average age of the US dairy herd and in all practicality make the herd more efficient and maybe even more productive. 

New Zealand production for the season was down less than anticipated.  Fonterra’s 2016-2017 forecasted pay price of $4.25 per kg MS below expectations of $4.50 which could entice additional herd reduction but the official announcement of La Nina ocean patterns could help.  La Nina tends to bring additional moisture to the major dairy areas of the islands.  Good pasture conditions should help to reduce supplemental feeding and therefore reduce feeding costs.

Supply side discussions seem to foretell of consistent supply in the US and Europe and what should be a less aggressive reduction in New Zealand. Those discussions then turn towards demand with thoughts that a price recovery - if there is one this year - is going to come from that side of the ledger.  Without some fresh demand (from Russia or currency driven, for examples), the crowd expects continued flattening of the futures curve will bring deferred prices generally lower. We can’t argue the logic here, but rarely is a market this cut and dry.

Look for Class III, cheese and whey to all open steady to lower.

Spot Session Results


Class IV, NFDM & Butter

Butter continues to be the favored market domestically finishing yesterday mixed as contracts as contracts settled between just over a penny lower to 0.475 cents higher with the largest losses for the day were registered in the September through November contracts.  Despite the widely accepted bearish connotations of the Cold Storage Report released on Monday the inability to register noteworthy declines could lead one to believe that a significant portion of said stocks is already spoken for, driving those still in search for product to generate the current price support. 

Non Fat prices have slipped from recent highs as we seem to be trading a wide band between 81 and 87 cents.  We may continue to see this type of chart pattern as European intervention seems to be adding an artificial floor to powder prices but will prolong recovery as inventories continue to grow.

July Non Fat futures


As our European team had earlier reported, the EU commission will propose a further increase in the SMP intervention ceiling to 350,000 MT as the current ceiling of 218,000 MT was reached yesterday.  SMP will continue to enter into intervention, but will not be at a set price.  We would expect the tender process to illicit lower prices into intervention and therefore pressure us to the low side of the price range.

We look for Butter to open firm and NFDM to open steady to higher.


The whole grain market is taking its lead from soybeans.  Soybeans rallied viscously yesterday dragging corn and wheat higher as drier weather forecasts limit the probability of unplanted corn acres switching to soybeans.  Today is the final plant date for corn in NE, KS, and most of MO, SD and ND.  Soybean planting in the WCB is expected to be exceptionally slow as rains cover the region while the ECB will remain relatively dry over the next 48 hours.  We estimate funds bought 16,000 contracts of soybeans and 8,000 contracts of corn yesterday.


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