Morning Dairy Comments, 09/07/2016

Wednesday, September 7, 2016

General Market News

· Milk powder prices still look vulnerable despite mini-boom

· Weaker U.S. Dollar provides tailwind for oil prices

· Ford posts best-ever August sales in China

· Pressure mounts on ECB to launch QE3

· Solid rise in world dairy prices boosts farmer confidence



Class III, Cheese & Whey

Another strong increase the GDT price index was amplified by firming spot cheese prices as class III and cheese futures rallied Tuesday. GDT Cheddar cheese was 9.0% higher to an average price of $3,436 or $1.5585 per pound. In just the span of about two months’ time, the spread between GDT cheddar and CME spot blocks has shrunk from a ghastly 50 cents to a more modest 15. In what feels like the blink of an eye, US cheese prices suddenly seem far less overvalued or expensive globally. Will this spur more exports? Too early to tell for certain, but US cheese is arguably more attractive for international buyer consideration than has been the case this year. If this is the case, the U.S. buyer may find him/herself pitted against the world bidding for cheese right on the cusp of heavier U.S. holiday demand. This could get interesting.

One quick counter argument often tossed around is that futures prices are running at too-steep-a-premium to spot. Current spot equivalent registers a low $16.00 milk price – not low $17.00. If the spot market does not move higher, nearby futures will have to acquiesce and fall. All true. The flip of this argument, however, is that the futures market is not wrong and spot cheese just became the cheapest price on the 2016 board. Over 30 loads of barrel cheese have traded in the past 3 days – there’s cheese out there, but there is no shortage of spot buy side interest at the moment. 
A brief look at technical indicators shows a posture of strength as well. The chart below shows the January to June 2017 class III pack. Earlier last week things looked weaker from a technical perspective as the contracts collectively broke down below their 20-day moving averages (thicker RED line). Yesterday first-half prices eclipsed that 20-day MA again and finished on their recent highs. The horizontal blue line is resistance (let’s say resistance is more than just one price point and rather an area of old highs to give ourselves a little margin of error). The market seems to be rather strong around resistance levels and because of this look poised for more upside.
Dairy farm profit margins are really looking good for 2017. And we’re saying that the milk futures market may make them look even better as we move forward into the fall. Keep an eye on grains though as firming action there cannot be denied even as we stare down a monster crop.

January to June 2017 Class III Pack – Daily Chart


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



Class IV, NFDM & Butter

Butter and NFDM futures showed strong volume to begin this shortened week. 342 butter contracts traded hands in a rather narrow price band as the low $2.00 level is a highly prized area for buyers today. Sharply higher GDT prices likely also underpinned US butter. AMF was up 15.4% to $4,769 or $2.16 per pound – the highest price since March 2014. Butter was up 14.9% to $3,764 or about $1.70 per pound – the highest price since March 2015. You can read more about this in our EU report. Suffice it to say, the world fat market is heating up and how.

Powder is heating up as well. SMP was up 10% to $2,224 or $1.00 per pound, which is closing the gap with WMP that showed a 3.7% increase. Interestingly, it was the nearby SMP contracts (months 1-3) that showed the greatest amount of strength, which could be slightly more indicative of legitimate tightness of product. Whatever the case, NFDM futures reacted by firming across the board on good volume (190 contracts) and we expect this to continue. Look for higher powder prices to come. We expect NFDM, Butter and Class IV to open mixed.


Weakness in the dollar supported grains yesterday as well as unseasonably high export inspection. Corn ratings were down 1% to 74% good/excellent; still above 68% last year and 54.4%, 3 year average. Beans conditions came in unchanged at 73%, 10% above last year and 18% above the 3 year average. Ultimately market support should continue as the USDA announced the sale of an additional 17.8 million bushels of soybeans to an unknown location this morning. We expect Corn , Soybeans and Wheat to open 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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