Morning Dairy Comments, 08/24/2016

Wednesday, August 24, 2016

General Market News

· Australia, NZ dairy companies stir hopes of market revival

· NZX WMP futures break through $3000/MT for first time in more than a year

· Low milk prices plague French dairy industry

· Emerging markets fall on Fed bets for rate hike as oil leads commodities lower



USDA Announcement on Cheese Purchase

The USDA announced yesterday that it will purchase 11 million pounds of cheese under Section 32 of the Agricultural Act of 1932 to supply food nutritional programs across the country. While 11 million pounds of cheese is a far cry from requests, we’re impressed with the speed at which the government has moved on this. Perhaps they’ve been mulling over some sort of purchasing program since Spring when prices were closer to $1.30 than $1.80. Or perhaps they’re wanting to make a move ahead of the election. Either way, they’ve earmarked $20 million of 2016 finances which means we expect a bid announcement from the Commodity Credit Corporation (CCC) division of the FSA within a week or two at most as 2016 fiscal year ends September 30.
Before we get into what impact we think this will have on the market, we’d like to take a quick peek at the government math. $20 million divided by 11 million is $1.8180 per pound. While that’s close to the current spot price, we’re going to go out on a limb here and say that the US Government is NOT going to deliver a 500 lb. barrel of white cheese to the Greater Chicago Food Depository, for example. That means they’re going to be buying consumer ready cheese. Most 5 lb. loafs have a price range from the high $1.90’s to the low $2.20’s. In fact, the lowest wholesale price is $1.8950 for a fine Wisconsin 40 lb. cheddar block. And while there’s nothing quite like gnawing on a 40 lb. block of cheese, even that doesn’t fit the numbers presented. Either the USDA will have to spend more money or they will end up buying less cheese. We think they’ll spend more money on this program than originally stated.
Now that we’ve inflated a government program before 9AM, what impact will this have on our markets? At a time when cheese is legitimately tight it would be fair to argue that government intervention would be supportive of prices. Taking out 11 million pounds is close to knocking off about 0.6% of last month’s milk supply. But we don’t really know specifics right now. We don’t know what the actual bid announcement will look like or what delivery timelines will be. All we really know is their intentions and that principally they will buy far less than originally petitioned and they will use 2016 dollars. Although helpful, we’re not sure this latest announcement isn’t a day late and a dollar short. Especially with cheese already hovering north of $1.80.

Class III, Cheese & Whey

Yesterday’s spot cheese session showed Blocks falling 1.5 cents lower to $1.8450 with two trades while the Barrels contently sat at $1.8650 with no activity.  The Class III and cheese futures continue to modestly shed some premium after the bearish Cold Storage report and should once again look to the spot activity today to garner market direction.  Dry whey futures closed out the session with mixed pricing as the market consolidates after its most recent drive higher.  The spot cheese markets had previously looked capable of testing the $2.00 mark with the support of the approaching holiday demand season, though bearish fundamentals and a faltering Class IV complex should keep cheese values in check in the near term.  With the Class IV values priced at an extreme discount in the nearby months to the Class III we should expect to see steady to lower price action during today’s trading session.

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



Class IV, NFDM & Butter

The Class IV futures erupted with trading activity yesterday, tallying nearly 150 futures contracts traded while adding another nearly 300 option trades as values collapsed on component market weakness.  The September through June 2017 contracts closed out the day between 4 and 43 cents lower as both the butter and NFDM markets tumbled lower. 

The majority of the Class IV weakness could be tied to butter values retreating lower after the combination of the bearish Cold Storage Report and the 2.25 cent decline posted in the spot butter market.  Butter futures through July 2017 settled between a tick and 3.00 cents lower as the 2016 contracts near their 100-day moving averages – see 4th quarter pack chart below.  The 4th quarter pack is now technically vulnerable to further declines as various indicators project a bearish situation.  With a move below the 100-day moving average, currently hovering around $2.14, the pack average could potentially fall into support around the $2.11 region with additional technical support residing around the $2.0950 area.  The results of the Cold Storage Report revealed the first increase in butter stocks from the June to July period since 2004 pushing many market participants to question just how strong demand may really be while contemplating the true value of butter heading into the holiday demand season.  The path of least resistance remains to the downside as we anticipate some early session weakness ahead of the spot session. 

NFDM futures failed to generate the price volatility of the butter market, yet as over 250 futures contracts changed hands 60 positions were closed out as contract values settled predominately unchanged to 1.500 cents lower.  The spot NFDM value declined by 0.500 cents attributing to some of the bearishness of the day yet the day’s trading activity should be seen as more of an attestment to the market’s use of the forward curve to secure profitability and a rebuffing of the latest GDT auction results and the implied reduction in the WMP supply coming out of the Oceania region and corresponding demand going forward.

The CWAP for the week ending August 19th released yesterday posted at 84.400 cents, down 0.850 cents (1%) from the week prior while weekly sales were projected to have fallen by 51.7% week over week to 3,380,618 pounds. 

4th Quarter Pack Average


We expect the Class IV market segment to open lower.


The corn market was under pressure yesterday as the crop ratings improved 1% against the seasonal norm declines. Only the 1994 crop was rated better at this point in the season, 77% vs 75% G/E this year. The record 2014 crop was rated at 72% to give some perspective. Big crops get bigger and that’s what the market will be debating now. The Pro Farmer tour is showing some problems in SD and Ohio as expected. They will be touring Iowa today. The corn market failed on Monday and yesterday against key technical resistance points which brought in more technical selling. The funds are now estimated to be short over 160k + contracts. (See yellow line on chart)

Typical turn around Tuesday price action yesterday for soybeans. Stats Canada firmed the soybean complex up with a smaller canola production estimate. The market was estimated 18mmt but got 17mmt in the report. Total Canadian wheat production is expected to be 30.5mmt, up 10% from last yr. The trade was also talking about South America with the planting season coming up. Argentina is expected to delay lowering export taxes on soybeans until after their next harvest. This could mean more Argie corn acres being planted? Brazil could also see more corn acres planted due to high domestic corn prices after losing 8+ mmt of the Safrinha crop. Overall the market is hesitant to get too bearish on beans here as the carryouts are expected to be tighter than corn. The past 2 years have seen 400 mil bushel carryout projections drop down near 200 mil bushels by year end on better demand.


We look for the grains to open lower, down 2 to 5 in the corn and wheat, down 5-8 cents in the soybeans.  


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