Morning Dairy Comments, 08/05/2016

Friday, August 5, 2016

General Market News

· U.S. employers added 255,000 jobs in July; unemployment rate steady at 4.9%

· China plans to cut corn production

· NZ’s South Island to experience record  cold temperatures

· World food price drop suggests further rises unlikely

· Researches find no health risk from natural hormones in milk



Class III, Cheese & Whey

The industry watched with some level of amazement, the spot barrel market continued its skyward push yesterday. Closing up 5.50 cents to $1.8550 on 11 trades, the beat for barrel cheese goes on. Interestingly, the price of spot block cheddar rose 3 cents intraday before being sold off in the final seconds of yesterday’s spot call to finish back at unchanged.
The futures market was ambivalent about the action. On one hand, the barrel market seems to have almost irrational support. We realize barrel cheese is tighter in the country and yesterday’s Dairy Products report aids that narrative, but such strength seems in a word: overzealous. Fresh block cheddar by comparison is reportedly readily available.

We called yesterday’s dairy products report “neutral” based on our expectations and current price levels. Looking a little closer we see that cheddar cheese saw a decrease in production for the second straight month vs. 2015. June production was down 3.5% vs. June 2015. Cumulatively cheddar production is down 0.8% vs. last year. What has been lost in cheddar has been gained in Mozzarella as production is up 3.5% vs. last year. Important to note, but likely already priced into the markets. With this in mind, we look back to the somewhat unsure nature of the futures market for some insight into direction.

Both class III and cheese futures are trading right around recent high price prints. Ordinarily you could look at the posture of the market and deduct that it won’t take much to make new contract highs and continue the move upward. However, it’s equally important to consider trading volume. Volumes have been rather light around these new highs all week. Yesterday, in fact, was the first day class III volume eclipsed the 1,000 contract mark all week, and prices were lower (albeit only slightly). We’d say that the lack of volume could be due to reduced activity that normally arrives during the dog days of summer. But we’re not that prosaic.

Although the structure of the class III and cheese markets has shifted from a carry situation to a “backwardated” or inverse market over the past month, we see the lack of volume near contract highs as a warning signal for a corrective downward move on 2016 contracts. Commodity markets – all of them – tend to get to a point where everyone who wanted in is in and the market simply runs short of buyer activity. It is not necessarily a forgone conclusion, but that’s what it looks like we’re witnessing for class III and cheese today. And because of that, the burden of resurrecting aggressive buy side behavior lies squarely on the shoulders of the spot market in the short-term.
We look for Class III, Cheese and Dry Whey to open mixed.



Class IV, NFDM & Butter

The butter market has erased much of last week’s losses this week as chatter turned to the potential of another run to the upside. Butter production in June was well above our expectations for 143.93 million pounds at 152.86 million. At first glance it’s hard to say the report was anything but bearish. But the increase in butter production is somewhat balanced by referring to the latest Cold Storage report, which showed stocks below what we had anticipated. Even though inventories are still huge, that dynamic speaks to solid butter demand at current price levels.
Overall, it really comes down to the fear factor in that market as it has proven to defy logic more often than not in recent years. But our overall opinion of the butter market is not very bullish at all. Sometimes it’s best to look at the big picture and that picture is simply filled with butter.

NFDM futures traded lower across the board yesterday. Volume was solid with 290 contracts trading hands and open interest was only mixed as positions changed hands. The market looks poised for more weakness as forward curve premiums come under pressure as the spot market continues to chop sideways in the mid-80 cent range.
Nonfat production was 143.58 million pounds slightly lower than we anticipated but SMP production was up 59.5% year over year accounting for the slightly lower than anticipated NFDM production level. The stock levels of NFDM however, were actually higher despite the lower than expected production and for that reason more than anything else we would term this a slightly bearish report for NFDM.

The Dairy Market News Western Mostly NFDM price was down 1.00 cent from the previous week at 88.00 cents per pound. Last week’s CA Weighted Average price was 79.20 cents, up 0.61 cents from the previous week. The CME Grade A NFDM price is down 0.75 cents from last Thursday at 83.00 cents. There were 23 trades.

We expect NFDM, Butter and Class IV to open modestly higher.


Corn futures battled a string of crop forecasts projecting a larger than USDA projected 168 bpa throughout the day to register marginal losses during yesterday’s trading session. Weather concerns relating to dryness in the Western Corn Belt may buoy this market into next week’s crop report, acting as the last bastion of hope for market bulls in the near term. While new crop weekly export sales bested expectations, the lackluster demand for old crop corn coupled with lagging corn shipments, which now project to miss the USDA forecast for the year, should weigh down upon any rally. Funds were estimated to have sold 11,000 contracts on the day.   
As with the corn market, the efforts to rally the soybean contracts were dampened by surveys showing larger-than-USDA estimated yields.  The weekly export sales report revealed numbers on the high side of expectations while the pace of export shipments, if maintained, will exceed the USDA’s estimate for the 15/16 crop by at least 1 mmt.  Funds were credited with buying 1,000 soybean contracts while selling 3,000 meal.   

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


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