Morning Dairy Comments, 10/05/2016

Wednesday, October 5, 2016

General Market News

· Hurricane Matthew’s U.S. impacts: what we know right now

· Oil hits highest since June on possible US inventory drop

· Red Robin closes restaurants, rebrands others

· ECB ‘taper’ talk hits stocks, British Pound hits 31 year low



Class III, Cheese & Whey

Futures prices slumped yesterday on increased trading volume for both class III and cheese markets. 2017 hedge business was a key feature as producer selling has seen a modest uptick this week. Commercial buyers continue to scale in bids beneath the market as end-users like the prices, but remain unworried. That’s really the key to the market right now – the lack of worry.
The U.S. milk and cheese supplies seem to be fairly well balanced right now – if not a little heavy - and that is helping to erode futures forward curve premiums. With large inventories on hand, some of the holiday buying has been pulled forward already this year calming fears of a holiday rally. We’ve often said, however, that it’s not how holiday demand begins – but rather how it ends that tends to influence price more often than now. But for now, we expect more of mixed trade around current levels with the possibility of wash-out declines on nearby 2016 contracts.

Yesterday’s GDT fell 3%, ended a two month trend of rising GDT prices and ultimately was a win for the skeptics. The skeptics are those folks who see the recent rally through the lens of 2015 trading activity and don’t believe it is sustainable. In 2015 GDT auction experienced what it hindsight was a “bear bounce” before falling once again throughout the 4th quarter. While it can be argued there are similarities, the main difference we see today revolves around milk production in Europe, Australia and New Zealand – all of which are either actively attempting to slow milk production (EU milk production reduction scheme) or are facing genuine  weather challenges that have – or will likely – slow milk production over the next few months.
Markets rarely go straight up. Corrective pricing actions brought about by a pause in buying are actually quite commonplace. That is how we view yesterday’s GDT auction – a corrective move. Such action could last another event or two potentially, but here in the U.S. we want to make sure we don’t get lulled to sleep by our inventories and cow numbers. Yes the U.S. is truly the land of the plenty when it comes to dairy these days. But if there is a legitimate shift underway in global pricing, the U.S. will quickly look like a safe haven to secure product.

We mentioned crude oil in Monday’s comment and we feel it important to mention again today. Crude oil is a leading indicator for commodities in general. WTI crude made 3-month highs yesterday. Brent crude oil made 4-month highs. Our next sentence ought to be something about the U.S. dollar going down, but quite the contrary. The U.S. dollar also rallied yesterday and, in fact, made 2-month highs. This is a good example of how currency fluctuations are not the end all be all. For now the crude market looks technically bullish and ripping to the upside on the back of what traders believe will be a finalized OPEC deal in November and worry over Hurricane Matthew for good measure.

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



Class IV, NFDM & Butter

It’s been some time since the international and domestic markets for butter have aligned this closely. Yesterday’s GDT auction showed a 7.2% increase in contract 1, bringing the USD/lb.  adjusted to 80% butterfat to $1.8675/lb. During the spot session butter settled 2 ¾ cents lower to $1.8625/lb. This is a far cry from the almost dollar spread between the two last year. This equilibrium in price has all but stopped imports of fats into the U.S. That product is almost done working its way through processing plants and into foods on the shelves. The anticipation of a higher domestic market may have left those end users to heavily reliant on international fat sources and unhedged in the domestic market. These new buyers could be making their way to the market soon, which in turn could support a push higher.  

NFDM spot and futures have been coming off a bit since the end of Sep. That trend was given a nod of approval from a GDT auction that saw the average of all contracts for SMP and WMP down 3.9% and 3.8% respectively. The NFDM equivalent is still over a dollar a pound. Spot NFDM went unchanged at $0.93/lb. This sent futures mostly lower. Volume was strong for both futures and options. Options had their highest volume day since June 1st at 706 contracts. The volume was skewed to the put side, mostly in the Dec-Mar time frame.  Aug export numbers will be released this week, and we will be able to confirm China has indeed been picking up volume like the whispers around the industry have suggested.

CWAP still remains below 90 cents but had a solid showing last week. CWAP rose 2.1% last week to $0.8924 on 11.5 million lbs.

We look for Butter, NFDM and Class IV to open mixed.


After three days of gains corn was lower overnight. Much of the chatter revolves around harvest pressure right now, but the price action tells a different story as the December contract has gained 20 cents since last Friday. We still have more harvesting left to do, but so far it does appear as though the harvest lows are in. That said, the first wave of short-covering in corn may have ended for now.

Soybeans traded down slightly yesterday as the market continues chop sideways around recent lows. For buyers, we see this as an ideal time to lock up protein needs for next year if you have not already done so.

Brazilian grain export association Anec said yesterday that calendar 2016 soybean exports would total 52 million tonnes, well below their previous estimate of 57 MMT; they then see 2017 exports rising slightly to 53 MMT, with corn exports at an even 20 MMT in 2016

The USDA announced that farmer payments would total more than $7 billion this year due to low prices, or about 10% of farm income for 2016; that’s up from $5.2 billion last year. 2016 farm income is seen down 11.5% year-over year to $71.5 billion, the lowest since 2009 despite another record harvest

Corn opened 1-2 lower, Soybeans are 1-2 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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