Morning Dairy Comments, 06/02/2016

Thursday, June 2, 2016

General Market News

· Major Brazilian soybean producer files for bankruptcy as debt talks fail

· FAO’s dairy price index rose 0.4% in May due to continued demand for milk powder and butter, still down 24% year over year

· Saudi Arabia’s gesture for OPEC unity meets Iranian resistance

· Chinese manufacturing activity stumbles in May, factory jobs culled



Class III, Cheese & Whey

Yesterday we saw the first GDT auction of the 16/17 season trade higher with cheese jumping 7.8% to US$ 2,669 mt or about $1.21 lb.  Even a weaker spot market showing blocks and barrels down ¾ and 1 ½ cents respectively wasn’t able to push prices lower for long. Class III and cheese finished a bit higher. There was decent futures pack or strip interest in 2nd half 2016 as 41 cheese futures traded just around the 1.55 mark, but the real activity was found in cheese options. Over 2,300 cheese options traded hands vs. 777 in class III. 

There is likely some producer and inventory selling out for the second half, but overall the sell side is becoming less aggressive as the market zigs and zags mostly sideways this week. Commercial hedgers are working on tying up some coverage for the second half and beginning to give a more serious look to 2017.

We have seen 2nd half Whey futures rally 4 cents since its pack low on May 4th.  Every penny in whey equates to about 6 cents in Class III.  2nd half cheese futures settled just above the 20 day moving average of 1.5527 (2nd half pack settled at 1.5542) but traded both sides of it today. Overall both class III and cheese look well-supported around the current price levels, but don’t seem to have any immediate wall of worry to climb today. That is a recipe for mixed trading. We think spot cheese prices will trade around $1.40 average near-term.

The USDA will release the April Dairy Products report this afternoon. Milk production in April, which showed a 1.2% year-over-year gain, likely moved into storable commodities at mixed rates versus 2015. Production of dairy commodities in April is expected to be mostly higher with the largest gain occurring in butter.
Unless the report shows dramatic production changes for one product or another, we don’t expect much of a trading response from this afternoon’s report.

Key Thoughts 

· American cheese output to be up 0.7% from last year at 399.3 million pounds and 3.3% higher than the previous month.

· Other cheese, on a year-over-year basis is forecast to rise 3.9% to 603.8 million pounds. On a month-to-month basis, other cheese will likely decrease 0.96%.

· Total cheese production is forecast at 1,003.2 million pounds, 2.6% above 2015 levels and 0.7% above the previous month.

Last year, American cheese output was up 2.95%, other cheese decreased 0.2%, and total cheese gained 1.1%.

Regarding the Class IV products:

· April butter production is forecast to hit 175.7 million pounds, up 6.2% from 2015 but 0.2% lower than the previous month. In April 2015, butter production decreased 1.3% versus 2014 levels.

· Nonfat dry milk production is forecast to reach 174.7 million pounds, 3.4% less than a year ago but 5.2% above the previous month. April 2015’s nonfat dry milk production was 12.7% stronger than in 2014.

We look for Class III, Cheese and Dry Whey to open mixed/lower.

Spot Session Results


Class IV, NFDM & Butter

A client and friend wrote to us yesterday with a simple but difficult/critical question: “help me further understand just how the butter market has side stepped the near impressive level of butter inventory growth during the front half of 2016?” We thought we’d include our brief response this morning.
One potential issue is that the butterfat available is not in 80% Grade AA salted form. We’ve got plenty of AMF and butter oil and other types for industrial use, but of the 298 million lbs. in storage, we’re willing to bet a bigger chunk of that is not in the form that is tradeable at the CME. It’s conjecture because the USDA doesn’t break stocks down for us, but that is one issue.

Another issue is that demand for butter is better than it was 5-10-15 years ago. Because of that, and the price swing to $3.00 in 2014 coinciding, buying forward physical needs (and to some degree using futures/forward contracts) has become more popular. Because of this era of “risk management”, a great percentage of stocks continue to be owned by end-users than ever before (not necessarily more than 50%, but a greater percentage than say 10 years ago).

Finally there is some element of wanting to see how summer unfolds. If all continues to go well with milk production, butter selling could actually increase in August or September. Buyers at that time could be less- than-enthusiastic since many will have already pulled forward demand. We think this is a long-term consideration, but one that doesn’t matter much for today’s trade.

Ultimately, demand for butter and fat has changed dramatically and the industry is trying to figure out how to accommodate these changes while letting Grade AA salted represent the price of butter. You’ve got to remember, 7-8 years ago that’s all anyone made. Introduce new products, higher fat products, unsalted products, get the US consumer on board with it, open the manufacturers eyes to the export world and remove any sort of US price support  - and we’re all getting a first class ticket to a different type of butter show.

Not to say we will never trade down to $1.50 – but the dynamics of pricing and product has shifted enough over the past few years that $2.00 is possible even with nearly 300 million in storage (for the record, I cringed when typing this last sentence).

GDT was the story of the day yesterday in the Class IV market.  The weighted average of all products finished up 3.4% with SMP finishing 12.1% higher to $1,980 (adjust to approximate NFDM equivalent) or 89.8 ¢/lb. pushing futures up nearly 2 cents in the 3rd quarter.  WMP, which accounts for more than half of the volume, finished down 1.7% to US$2,205.  Butter was up 3.2% to US$2,762 or $1.25 lb.  BUT, this is the 1st auction of the season and we will need to see how prices fair as we get into July and full NZ production.

EU SMP intervention has been the discussion lately as it has lifted SMP/NFDM prices off rock bottom but should be noted could, like all supply side intervention, elongate the recovery period. Still we see a very real potential for NFDM to continue to move higher. The spot market made a new high for 2016 yesterday settling at 82 cents. Futures trading volume, open interest and price were up yesterday. Although the July to December NFDM market has been range bound between 85 and 95 since February 1st  (settling at 94 yesterday), we think there is a real potential to move out of that range to the upside as we roll into July. We likely don’t have all the news that would prompt a sharp move today, but most of the time that news will come out as prices rise – not before.

We look for NFDM, Butter and Class IV slightly higher.


Soybean futures were the driving force behind yesterday’s strong rally across the grain complex as the NOAA’s 30 day weather model added fuel to the demand driven surge. The demand based buying hinges on the prospects of additional demand in the latter half of the summer as Brazil’s export basis is pushing higher while speculation remains high that the Argentina crop will have quality issues. Chinese crush margins are improving, with excellent livestock feeding margins, which could see China remain active importers of both U.S. and Brazilian beans.  Corn futures were flooded with buy side interests as the market shook off the good planting progress, crop ratings and beneficial weather to focus instead on the prospects of warm, dry conditions later in the growing season. 

We look for Corn and Wheat steady-slightly higher, Soybeans 5-9 higher.


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