Morning Dairy Comments, 10/24/2016

Monday, October 24, 2016

General Market News

· Chinese police arrested 19 people for repackaging & selling expired dairy products originally from NZ Fonterra

· Butter pricing has fallen steadily for the past several weeks. So far, inventories are in a good position for fall demand

· Milk production in the EU was increasing about 5% early in the year & dropped below year ago levels starting in June

· 50-cent meltdown in the CME spot butter market since mid-August has attracted more buyers, both domestically and in export markets



Class III & Cheese

Volatility reigned supreme to start last week, coming in like a lion but quickly chilled and went out like a lamb as the market figures what to do and where to go after milk production came in 2.1% higher (right in line with estimates) and cold storage affirmed still heavy stocks, with total, cheese coming in 7.42% higher from year ago levels, at 1.238 billion pounds. That’s a lot of cheese and we all know it, which is why that number is likely already priced into the market. What is interesting though is that for the first time in six years there was a counter-seasonal cheese inventory build for American stocks. Typically we’re looking at a 10 million pound drawdown this time of year however inventories ballooned 6.46% from year ago levels, to 744 million pounds—not bullish.

This could keep the market on edge and even more so that the disparity between the spot cheese equivalent at the CME and futures have now drawn to near parity over the past week, the trade will likely take a shoot first—ask questions later when it comes to direction. The bump higher for blocks and barrels had many raising their eyebrows and the trade basically adopting an attitude of “prove that it’s real”. This is where we stand coming into a fresh week, with many nearby contracts hovering near technical levels of interest and the spot spread at a wide 8 cents, with blocks at 1.65 and barrels at 1.57. Granted, where at a time on the calendar where seasonal demand should offer some support, however there is the likelihood that a good percentage of that demand was pulled forward and considering where the market is at from a stocks standpoint, equilibrium is probably more around the 1.50 mark rather than 1.60.

For the week ending October 15th, the National Dairy Products Sales Report reflected more slippage in the block price, which dropped to $1.5757 on increased sales volume of 13,798,375 million pounds. The barrel price shed value as well, coming in at $1.5440 on increased sales volume of 11,037,538 million pounds. Dry whey did post gains however, coming in at 0.3252 on increased sales volume of 6,152,055 million pounds.

In last Thursday’s monthly Livestock Slaughter report, USDA-NASS reported September dairy cow slaughter at 245,100 head, down 2.7% versus 2015 levels. On a daily basis, September slaughter was 3.5% higher than the previous month. Year to date, dairy cow slaughter at 2,152,400 head is running 1.3% below 2015 on a daily basis.

We look for Class III and Cheese to start higher, Dry Whey to open steady.



Class IV, NFDM & Butter

The butter market finished Friday’s trading session with mixed, but mostly higher prices after the half cent increase posted during the spot session ahead of the Cold Storage Report.  The largest gains of between 0.675 and 1.000 cents were tallied in the January through March contracts while the 2016 contracts remained mostly steady as hedging interests and trading activity continues to be driven to the deferred months. 

The Cold Storage Report for the month of September was viewed as bullish versus our expectations as butter stocks fell 49.6 million pounds, 15.5 million pounds more than projected, to 269.2 million.  To add to the bullish interpretation August’s stocks were revised 3.4 million pounds lower.  Despite the vast drawdown in stocks, current inventories still sit 43.5% higher than year ago levels which should temper the exuberance of the market bulls. 

NFDM futures moved mostly lower to end the week with the brunt of selling pressures concentrated in the first quarter of 2017 contracts.  Global stocks will continue to weigh on contract values in the coming months as demand has yet to materialize in in volumes large enough to counter ongoing production. 

We look for butter and NFDM to open steady to higher, Class IV steady.


Corn futures closed out last week’s trade with minimal gains as fund buying, estimated at 5,000 contracts, was met by new of Vietnam halting U.S. DDG imports mid-December due to concerns over beetle contamination of U.S. shipments.  Vietnam accounts for an average of 5% of total U.S. exports each year.  Coupled with China’s previous announced consideration to practically end its imports of U.S. DDG’s, nearly 6 mmt of annual exports are now at risk, which would place downward pressure on prices. 

Soybean contracts added between 5.25 and 7.75 cents through November 2017 on the back of seasonal buying along with South American production concerns.  Despite the soybean futures ending the week at their highest price points in four weeks, technical resistance capped the rally to the upper end of the two-month trading range.  Funds were estimated to have purchased 7,000 soybean contracts and 2,000 of the bean oil. 

The wheat market slid just over two cents lower as technical resistance and a lack of bullish factors led to funds selling 2,000 contracts on the day.  High protein wheat continues to catch a bid in the cash markets yet significant supplies will continue to thwart extended efforts to drive prices higher. 

We look for corn and wheat to open lower, soybeans to trade 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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