Morning Dairy Comments, 05/31/2016

Tuesday, May 31, 2016

General Market News

· Chinese stock market flash crash of 12.5% in less than a minute before full recovery

· Mexico’s Grupo Lala expanding in US with purchase of Laguna Dairy

· Fed’s Bullard says global markets seem well-prepared for summer interest rate hike

· Millennials think they’ll earn six figures by age 30, expect to work until age 90



Class III, Cheese & Dry Whey

Friday’s spot cheese session closed with blocks unchanged at $1.38, while barrels were up a penny to $1.44 on 12 trades. Class III and cheese futures had a volatile day with heavy early morning trading that saw some explosive moves higher, before ultimately settling lower after the market viewed the spot session more negatively with plenty of barrels available. The heavy early morning trades in Class III can likely be credited to speculative traders covering short positions. Class III futures posted 1,113 trades, with open interest only increasing by 76 contracts; June open interest declined by 31 contracts on Friday.

Although we ended last week on a lower note, there are a few aspects that may continue to underpin futures. The most recent CFTC’s Commitment of Traders report (released every Friday) shows Money Managers were short over 3,500 Class III futures (orange line) as of last Tuesday May 24th.


Compared to markets such as grains or energy, the funds have much less of an impact on the milk markets. It seems that over the past few years a good deal of new speculative money has come in to the arbitrage class III and cheese futures, which means certain speculators care less about price direction and more about the spreads between class III/dry whey and cheese futures. They can’t figure out who will do what during the spot call and they don’t have to if they’re trading the spreads. But it is worth watching the short position on class III since historically the spec spread trade was seen selling cheese futures and buying class III. In other words, as the speculative money has mounted a larger net short-position for class III, the market may still be at risk for additional short-covering if cheese and dry whey continue to edge higher.

We’ve all seen short-covering rallies. Those typically sharply higher “up” days that are followed rather quickly by calmer heads and a sell-off. But perhaps there is more to the recent strength for cheese. For example, late last week FrieslandCampina announced their intentions to raise their offer prices for cheese from unsustainable low prices. EU co-ops have been less aggressive selling cheese at low prices as they want to avoid milk returns below intervention levels. The firmer EU cheese prices could be supportive to US domestic cheese as the spread has narrowed between the two. Now US cheese export prospects look slightly more attractive as EU and US prices are more in line.

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

Spot Session Results


Class IV, NFDM & Butter

The spot NFDM market closed up 1 ½ cents on Friday to 79 ½ on 5 trades. Futures firmed up across the board with 70 trades in the books, while open interest increased by 64 contracts indicating new buying and selling in the market. Same with cheese, flat price offers for powder are firming up in the EU, as there is less incentive to aggressively sell with the EU’s buying. As for right now the intervention program will face another tender round, with prices expected not to move much from intervention levels. A 3rd round of intervention, this time for 130,000mt is being proposed.

The chart below shows the relationship between CME September NFDM futures vs EEX Sep SMP futures. The chart shows that since March the EEX Sep futures have been slowly adding some risk premium above intervention levels of €1,698/mt. Some of this is due to a weaker dollar over this period, combined with offers becoming less aggressive. The Sep NFDM futures have been range bound from 85 cent support to 95 cent resistance since the beginning of Feb.


Spot butter traded once and settled unchanged at $2.0650, although 4 offers were overhanging the market. Butter futures were mixed across the board as there still seems to be no dominant direction in the market. This is after the entire market completely digested inventory numbers close to 300 mil pounds. It’s reported some butter manufactures are actually not concerned with their inventories, and are diligently sticking up for the Q4 demand. Apparently the market is brushing off the fact we are sitting on a bunch of imported fat. In Q1 the US imported approx. 8,000 mt of AMF vs 3,000mt in Q1 2015.

We look for Butter and NFDM to open mixed.


July corn futures on Friday finished up 4 cents firmer. Bull spreading dominated the market again as shorts were pushed out of the spreads. China marketed some corn from their reserves on Friday and only successfully sold 890,000MT of their 2MMT intended offerings. The auction was offered to domestic end users at prices near $5.70/bu which translates to a $3.30 loss to the Chinese government.

A choppy session in beans, with meal in liquidation mode as speculators started taking profits. The USDA announced 110,000mt of new crop bean export sales, and 100,000mt of meal. China continues to actively import beans even with concerning negative crush margins which are in line with 5 yr seasonals, but this the opposite of last yr. China continues to see offers from South America  at 25 to 70 cents/bu under US export offers.

As of May 26th, the Argentina soybean harvest is 72% complete vs last year’s pace of 90%. Arg producers are still well behind as the rains earlier in the harvest did some damage. The Buenos Aires Grain Exchange estimates the bean crop at 56 million MT.

We look for Corn to open mixed, Soybeans 4-5 higher and Wheat 2-3 lower.


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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