Morning Dairy Comments, 06/06/2016

Monday, June 6, 2016

General Market News

· Commodities rise with emerging markets on Fed view

· Canada compensates its dairy farmers for EU imports

· Italy to introduce mandatory country of origin labeling for dairy

· China’s debt load much higher than previously thought

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



Class III, Cheese & Whey

Friday’s spot cheese session showed further strength with blocks trading up 4 ½ cents to $1.44 on 9 trades. Barrels were up 1 ½ to $ 1.44 ½ on 12 trades. Bidding was active into a hard close. Speculative short covering on Class III futures was a key feature. The July Class III futures settled 42 cents higher to $13.91 on 934 trades; yet open interest was down 42 contracts. While Friday’s activity could be a harbinger of things to come, such a swift rally often fades as quickly as it materialized. That said, making new lows may be off the table for 2016.  

The cheese market is showing support in response to a few trends apparent lately. One trend continues to be the health of the domestic demand. There is plenty of skepticism on this front, although you cannot underestimate the power of promotions. With cheese prices at these levels, end users are looking to buy extra cheese to supplement their contracted purchases. We should expect restaurant chains to continue promoting heavily with value menus back in the spotlight.

Another point for cheese prices firming is the strength in the NFDM markets. With a bid for powder, Class III prices have been discounted to Class IV. July Class III for example was about $1.30 discount to Class IV, as of Friday’s rally it stands at a 59 cent discount. The April USDA Dairy Products report showed a clear shift of milk in California likely heading to the dryer vs the vats. CA’s April American Cheese production down 9.1%, down 5 mil pounds to 51.2 mil pounds total. April mozz production in California was flat at 131 mil pounds, yet we saw CA’s NFDM production down 21.4%, down 17 mil pounds to 60 mil pounds. Total skim milk production was up nearly 10 mil pounds or up 30.7% from last April. Most of the increase in SMP production could likely be credited to CA.

April cheese export numbers released on Friday showed the US exported just over 21,000mt down nearly 10,000mt or down 33% from LY (see chart below). Most of the damage can be credited to key markets such as South Korea and Japan, down 57% and down 44% respectively.

WPC exports were strong up 5% over last April. Year to date, WPC exports are up 5%, and China specifically is up 5% for the year. Dry whey exports continue to lag, and are down 28% so far in 2016. Although the US is competitive vs the EU in the world market for dry whey and should see exports recover.

USDA Dairy Market News (Price Table below) showed the Central and Western mostly prices flat, just shy of 24 cents.


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



Class IV, NFDM & Butter

The NFDM spot session was quiet and settled unchanged at 81 ¼ cents with no trades, although 2 offers standing. The NFDM futures were firm with light volume on Friday. The market is mostly focused on the sentiment that the EU’s intervention program is providing a floor. Offers in the EU are less aggressive; in fact Dutch prices were up €30/mt to €1,680/mt, while German and French prices were flat at €1690 and €1,660, respectively. These prices are right in line with the intervention price levels, which translate to a USD price of 1,930/mt or roughly 88 cents this morning.

Spot butter was bid all the up to $2.13 ½ before ultimately settling at $2.10 as the bids were cancelled and moved lower. Butter futures showed another strong day as the market continues to debate the demand side of the equation. Retail and foodservice demand is still said to be firm. The 4th quarter futures are a focus area for buyers who have been actively seeking coverage. California produced 51.6 mil pounds of butter in April, down nearly 5 mil pounds or down 9.5%, but churns across the rest of the country are trying to fill the gap as total US butter production in April was 176 mil pounds, up 6.4%.

April’s export report showed just over 46,000mt was shipped, down 11,000mt or down 19% over last yr. For 2016, NFDM exports are down 19%. Mexico buying continues to be apparent; they bought just over 21,000mt in April, up 22%. US exports to Mexico are flat vs 2015’s pace, yet nearly up 43% from 2014’s Jan-April pace. Exports to SE Asia countries were off 29% in April.


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


Corn and soybeans are off to the races again to start the first full week of June. Corn was 7-8 cents higher overnight. December new crop Corn traded to $4.28 ½ - a price level not seen since the first week of in nine months. November new crop Soybeans eclipsed the $11.00 mark for the first time since July of 2014 (nearby contracts are not making new highs). There are a lot of moving parts to these grain markets so far this year, but if you boiled down recent activity we think you’d see that speculative fund buying is capitalizing on US weather uncertainty. Although it’s been hot out west recently, the Midwest has been ideal for growing. But no forecaster ever called for problems in June. It’s August they’re concerned about. And until the trade feels more confident that we are NOT going to burn up a crop of beans this year, expect increased market volatility.
All that said, both corn and soybeans look a tad bit overbought here. December corn “gapped” higher last night. A market that “gaps” higher after having been up for several weeks in a row is possibly signaling some level of exhaustion. They literally call it an “exhaustion gap” for a reason. If the corn and bean markets are at some kind of overbought level, we should know rather soon (next day or so) since a corrective move downward would be imminent. Ultimately, however, this would likely provide more volatility over the next few weeks, since we’re not so sure that a long-term top is yet in.


We look for Soybeans, Wheat and Corn to open higher.

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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