General Market News
· California lawmakers send governor bill authorizing farmworker overtime http://goo.gl/wlNmKm
· Food price deflation hurts farmers, grocers and restaurants, cheers consumers http://goo.gl/jnFTfHb
· France joins Germany Economy Minister in urging halt to trade talks with U.S. on TTIP http://goo.gl/zLbhGR
· Hershey falls more than 11% after Mondelez says it has ended merger talks http://goo.gl/ddU2wC
Class III, Cheese & Whey
2016 class III and cheese futures finished mostly steady/mixed yesterday after shrugging off additional spot weakness and finishing off low price prints traded during the spot session. Volumes were moderate with over 1,650 class III and nearly 400 cheese contracts changing hands as open interest continued to increase (with the exception being the September 2016 contract, which continues to see open interest declines lately).
The resilience of the markets in the face of steady sell pressure yesterday is twofold: (1) the market has made no qualms about carrying a premium to spot. With AMS numbers consistently running some level of premium to spot averages, market participants are willing to leave maybe 30-40 cents of premium to spot. (2) We have a few more weeks to price September yet ahead of us, so there is an element of upside risk should spot show even a day or two of strength. Spot doesn’t have to show strength, but this early in the pricing the trade will leave in some risk premium for the possibility. Beyond that, more pronounced areas of technical support also came into play over the past two trading sessions, which is a supportive feature for class III/cheese futures.
We’ve talked about Fibonacci retracements before, but at the risk of repeating ourselves we’ll explain it a little more this morning. Hundreds of years ago an Italian mathematician named Leonardo Pisano (Nickname Fibonacci) devised a sequence of numbers that recur in nature. The recurring sequence gets the attention of traders (generally) when the market (any market) begins to make a counter-move.
From mid-July to mid-August, the September Class III price worked its way higher. Once the market failed to continue higher, traders put up a Fibonacci tool on their charts to give themselves an idea of what type of pullback or correction they can expect. This is an oversimplification in general, but specifically traders tend to consider are 38.2%, 50% and 61.8% retracement levels of the prior move. These are key Fibonacci ratios that occur in nature. And it impacts many of life’s decisions and perceptions. For example, according to Fibonacci ratios - if you had $100 and went out to the bar Friday night, you’d start to think about getting a cab by the time you spent about $61.
Seen below, the September class III futures stopped going down – even though spot weakness persisted – at right around the 61.8% retracement level. It’s not magic, it’s nature. And it doesn’t mean we cannot go lower at some point, but from a day-to-day perspective, it’s critically important to watch how the market acts around certain technical levels including these Fibonacci levels. Although spot cheese has been weak lately, from a technical perspective we look for a bounce on futures.
September Class III Futures
Cooperatives Working Together announced yesterday they accepted requests for export assistance from DFA and NDA totaling 1.9 million pounds of cheese and butter export sales. This year alone CWT has assisted member cooperatives with exporting 33.5 million pounds of American cheese, 8.5 million pounds of butter and 21.3 million pounds of whole milk powder.
Class IV, NFDM & Butter
Class IV futures showed a little green today finishing up an average of 7 cents in the 2017 1st half pack, and unchanged to 14 cents higher overall on the firming of both the NFDM and butter markets as over 300 contracts changed hands. NFDM futures settled unchanged to 1.750 cents higher in the October 2016 through December 2017 months as the uptick in the spot value coupled with technical support brought buy-side interests to the market. The December NFDM chart below shows a technically stronger market which has been able to claw its way through resistance caused by the 100 (yellow line) and 20 (green line) day moving averages to settle yesterday just below the 50 (blue line) day.
We little fundamental news slated for this week, as we only have CWAP to look forward to later today, the technicals of the NFDM complex should help to guide price action ahead of the next GDT auction on September 6th.
The butter market has traded sideways since extending the recent weakness from a very bearish cold storage report with 2016 contracts drifting lower yesterday while 2017 month settled unchanged to 2.225 cents higher. We could term the trade as consolidation but expect buyers are assessing their risks to another strong move higher in September and October. Multiple times over the last few months we have discussed our belief that buyers have been more proactive and have been engaging in more risk management this year than in those previous and expect that any rallies in the butter market will be muted as panic buying will be less prevalent this year.
We expect the NFDM to open higher and Butter to open lower.
Corn and wheat continue to shed value as it becomes more and more apparent that corn will have to compete with wheat for feed as both domestic and world wheat markets are awash with grain. The corn futures pushed lower ahead of the crop progress report with the help of the funds selling 15,000 contracts as the harvest is making its way north from the most southern regions of the Corn Belt. Crop conditions continue to maintain as the soybeans gained 1 point in its G/E rating over last week while the corn held steady at 75% G/E. The corn crop is in the running for the 4th best rated crop to start September since the NASS survey began with its current rating could project to a yield greater than 175 bpa. With cash corn offers sitting closer to $2 than $3 corn should see more weakness in the near term.
Soybeans moved lower prior to the crop progress report which now has this year’s crop in the running for at least the second best crop on record. Crop tours have promoted the idea of a national yield that could surpass 49 bpa. Export inspections continue to register record volumes as 921 tmt were shipped last week. To date 1.848 billion bushels have been loaded, and if this pace holds into the last partial week of the season, total exports will best the USDA’s August estimate of 1.880 billion bushels by as many as 25 million.
Wheat contracts tumbled to new record lows in the face of a burdensome domestic and world crop. Lackluster weekly exports are of late are of concern for the domestic market as U.S. wheat is priced uncompetitive compared to global exporters. Funds were credited with selling 6,000 contracts ahead of the crop report which revealed the wheat harvest at 81% completed vs. 62% 5 year average.We expect grains to open mixed.
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