Morning Dairy Comments, 06/28/2016

Tuesday, June 28, 2016

General Market News

· U.S. milk powder producers adding capacity despite global supply glut

· Americans dining out less as economy cools

· Murray Goulburn announces 2017 opening milk price at $4.31 kg/MS

· Equities rebound as Pound rebounds with commodities

· Crude oil prices rebound on looming strike at several Norwegian oil and gas fields



Class III, Cheese & Whey

Class III and cheese futures managed to rebuff a portion of the selling pressures of the first half of the trading day as the incremental gains of both the Blocks and Barrels tallied during the spot session stymied the drive lower in values.  Class III futures closed out the day with mixed pricing as the June 2016-June 2017 contracts settled between 11 cents lower and 6 higher.  The cheese futures followed suit as the 2016 contracts ended the day between a penny lower and 0.4 cents higher.  Trading volumes for both markets were lighter than what we have become accustomed to as the Class III registered 1,300 trades while the cheese futures managed nearly 500.  

Both markets face a bit of a quandary as both bullish and bearish fundamental factors are colliding amid a unique and singular event has thrown markets around the world into turmoil.  The Dollar Index has surged higher in value by 34% over the previous two trading sessions, aided by the flight to save haven investments created by the Brexit vote.  Commodities in general typically maintain an inverse relationship to the performance of the Dollar Index as investors shy away from commodity markets when faced with a rising Dollar value.  While the impact of the stronger Dollar may not have an immediate impact, on dairy markets, the stronger Dollar should diminish the interests of dairy importing nations for U.S. products.  The disparity in global cheese prices, as highlighted in the chart below, already put U.S. product at a competitive disadvantage while this currency volatility could lead to even greater price disparity in the coming days and weeks. 

The more immediate factor, that has some of the buy side interests in the market becoming active, is the ongoing heat wave out West.  The Southwestern states have endured 100 degree plus conditions for the past couple weeks that has some producers contemplating thinning their herds as dairy balance sheets are hurting by the combination of low milk prices and falling cattle values.  While California has escaped some of the worst of the heat wave their reprieve is to be short lived as temperatures in the Central Valley will surpass 105 degrees this week further repressing milk production in the region.  While, historically speaking, milk prices typically bottom around the outset of summer the price volatility of late has this current market situation performing as anything but typical.  The Class III market segment should experience an overall bullish trend in the near term as milk production declines out West are being priced into the market currently. 

The potential caveat to this expectation will remain the performance of the Midwest states as Wisconsin and Minnesota have yet to experience anything close to the high temperatures the rest of the nation has enjoyed, with temperatures in both states not expected to rise above 80 degrees until the 4th of July.   


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



Class IV, NFDM & Butter

NFDM contracts pushed lower yesterday as the ¾ cent decline posted during an active spot session that saw 9 loads change hands motivated hedgers to capitalize on the elevated price levels afforded by June’s nearly month long rally. The price action of the NFDM market throughout this month has pushed U.S. product values above those of both the EU and Oceania as demonstrated in the below chart.  This significant surge in price coupled with the spike in the value of the U.S. Dollar should hamper international demand for domestic product as importers will look to capitalize on the recent volatility of the global currencies to source product at advantageous prices.  While domestic demand for powder remains resilient the 4th quarter contracts should be vulnerable to price declines to push those contracts back below the $1.00 mark to move more in-line with the fundamentals of the market.    


The butter continued its recent trend of declining values as the July through October contracts settled between a tick and 1.975 cents lower while accounting for all 22 of the day’s trades.  The massive gains in price posted through the first half of the month seems now to have been too much too early in the year to be sustainable as concerns surrounding the availability of product led to a buying frenzy.  While butter futures prices have drifted lower, over the past week, this retracement pattern should be short lived with hedging interests poised to return on the buy side, if contract values are capable of moving much lower.  

We look for Butter to open steady to 2 cents lower, NFDM firm and Class IV to open mixed.


Grain markets put up a mixed showing to start the week with beans exploding out of the gates and bucking the larger, macro pressure which drove many commodities into the red as a result of continuing fallout from Brexit. By the closing bell, nearby bean contracts had advanced 30 cents while the new crop November contract tacked on 26 ¼ cents to settle back above the $11 mark. The soybean crop rating did see a 1% decline to 72% good-to-excellent, but the main driver here remains the weather picture as more heat was added to the forecast in mid-late July, with along with drier conditions along the way. Carryout numbers remain a concern in that any blip on the radar from either a domestic or global standpoint will direct adjustments to our balance sheet which will then be stretched thin if late summer heat does negatively impact yield.

Corn, on the other hand, may just dodge that bullet as the critical pollination stage will likely be completed prior to the forecasted heat event. The crop rating remained unchanged at 75% good-to-excellent and though there are some dry areas out there, all in all the crop is holding up just fine. It may be a bit early to call the crop “made”, but fund managers sure have lightened the bullish load of late which took the new crop December contract to sub $4.00/bushel levels late last week, pinning it to the 200 day moving average which could offer some support (black line on chart below).

We look for Corn to open 2-4 higher, Soybeans to open 15-20 cents higher with Wheat to open 4-6 cents 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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