Morning Dairy Comments, 08/19/2016

Friday, August 19, 2016

General Market News

· OPEC production freeze wouldn’t be so potent as Gulf rivals pump more

· European stocks, oil ease as markets shift focus to Fed

· U.S. Dollar rebounds to pare worst slide since April

· How a dairy firm at the end of the earth is trying to rule the world



Class III, Cheese & Whey

Thursday brought with it more strength and more volume for class III futures. Over 2,000 contracts traded hands for the second day in a row pushing futures higher for the 4th day in a row. Block cheese and dry whey strength have really been the story all week.  The block market gained 4.5 cents yesterday on 10 trades and is up 9 cents on since Monday with a total of 25 trades taking place (there was an unfilled offer left on the board yesterday, so perhaps the buying is near done). Dry whey futures are up approximately 3-4 cents this week well out into 2017 as chatter heats up about China’s purchasing prowess (we’ve heard anecdotal numbers that are well above the high 30 cents per pound area U.S. dry whey futures are trading). This week has been about demand – for whatever reason – and not about supply.
From a global perspective, supplies of milk are tightening up. U.S. milk production, faced with less expensive feed and less-than-attractive beef prices, continues to hum right along (hot weather in certain areas like California notwithstanding). As our colleagues in Europe reported a few days ago:

Combined milk production for the five major dairy exporters fell further in June, estimated at 22.69 million tons, down 2.09% on the 23.18 million tons produced in June 2015. The US was the only one of the major producers see an increase in production compared to last year, NZ production was flat while EU, Australian and Argentinian production were all lower.  Cumulative global collections for January to June are estimated at 144.97 million tons, 1.50% ahead of the same point last year but down from the 2.19% year on year difference observed in May.

We’re looking for July U.S. milk production to show a 1.2% increase versus last year. 1.2% growth is about par for the course. 1.2% growth is about neutral. We need that kind of growth. South of 1.0% and we’ll call it a bullish supply situation. North of 2.0% and we’ll call is bearish. The most important takeaway at current, however, seems to be the rally has been demand-driven, not necessarily supply-driven. 
Cheese futures didn’t enjoy the same type of volume that its class III brethren did yesterday. Just over 200 cheese contracts traded hands as 2016 futures push higher while 2017 contracts stick like glue to the $1.70 mark. Technical resistance is still at play for 2017 cheese futures.
For the week ending August 6, dairy cow slaughter under federal inspection was down 0.4%, at 52,200 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.6% lower than 2015 levels, with 1,753,400 head slaughtered.

The Central Mostly Dry Whey powder price was up 2.00 cents from the previous week at 28.50 cents, while the Western Mostly price was 0.25 cents higher at 30.00 cents.

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



Class IV, NFDM & Butter

The NFDM spot market was unchanged at 86.5 cents with 3 trades. The NFDM futures traded soft across the board. On Wednesday SMP prices in the EU showed German prices at €1,830, French at €1,770, and Dutch at €1,800, each up €30/mt. 3,181mt of SMP entered the EU’s intervention last week vs 4,636mt the week prior. These most recent price increases above intervention levels show that the EU market has more confidence selling SMP to private buyers for better returns. EU SMP exports total 41,694mt in June, down from 54,362 in June last yr. Year to date EU exports by destination in chart below.


The spot butter market edged a ¼ cent lower to $2.20 on no trades yesterday. Although the butter futures continue to shed some premium as market sentiment is more bearish. Looking at today’s milk production report should give a good indication on California’s cream situation. In June’s report they were down 1%. California has recently been a net cream buyer vs a typical cream seller. With Class III/IV spreads looking ugly with August at +$2.26, Sep +$2.66, and Oct +$1.80 this will inhibit any economic incentives for milk going to the dryers vs the cheese vats, which ultimately may lead to a tighter cream outlook. 

September 2016 Class III/IV Spread


We expect NFDM, Butter and Class IV to open lower.


Corn futures shrugged off the early session weakness aided by the strength in a broad-based commodity rally. Weather forecasts for the Corn Belt are looking good as rains are forecast for the next five days, though the heavy rains expected in the Delta will impact harvest rates. Yesterday’s weekly export sales figures were a bit of a disappointment for old crop corn which is now expecting to fall below the USDA’s estimate for the year. New crop corn sales though topped expectations with commitments running at the 2nd highest level of the last five years.
Spec funds were credited with covering 7,000 of their estimated 132,000 short positions. Remember, the funds have a big net short position on corn. Fundamentals are damned if the corn market catches a bid and the funds run for cover. It may not last, but don’t let a speculative short-covering rally catch you off guard.

Soybeans recovered much of their overnight weakness to settle near unchanged on the day. Weekly export sales were on the low end of expectations for both old and new crop, as the old crop soybeans sales are projected to fall below the USDA’s forecasted yearly total.  This lower sales figure could boost the carryout figure 25 mmt higher than the USDA’s August projection of 95 million bushels.  The stronger than expected soybean meal sales helped to support bean values, with the yearly total sales projecting to top the USDA’s full year estimate by 100,000 mt. 

Wheat futures recovered throughout the session despite low trading volume while weather forecasts are supportive for U.S., FSU and Australian crops.  Weekly export sales were in the middle of trade expectations while the commitments to date are running 1.93 mmt above last year levels.  Cash sales by producers have been light as it is better financially to store wheat than sell it.  Funds were credited with covering 2,000 of their 111,000 short positions on the day.


Corn and Wheat are called to open 1-2 lower, Soybeans 10-12 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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