Morning Dairy Comments, 11/02/2016

Wednesday, November 2, 2016

General Market News

· Stocks open lower on election uncertainty

· Ornua acquires US dairy Ingredients business

· Oil extends losses after report shows surprise US crude stockpile build

· Gold at 1-month high ahead of Fed update, lifted by election uncertainty

· NY warns Canada over dairy regulations



Class III & Cheese

Impressive is the best way to describe yesterday’s volatile trading session. Huge trading volumes were the hallmark of class III and cheese trade as the price spike continued on the first day of November.  2,133 of the 3,155 class III contracts traded in November and December alone. Nearly 1,200 cheese contracts changed hands with just over 50% of the volume also trading in the October thru December contracts. Open interest also rose for both contracts (quite materially for class III in particular). These types of trading numbers tell us a few things: (1) there is new money pouring into milk and cheese, and (2) the trend is up.

Now who among us would disagree that the class III and cheese futures markets may now be a little over-heated? Markets don’t generally go up unabated forever. And we’d expect that there is still some fresh cheese out there somewhere that can come to market – particularly when that cheese (block) can now fetch a 2-month high of around $1.80. That being said, the market direction is up. Even if we see setbacks to price (which we think is in order) – the larger overall direction is still higher.

We can initially chalk up the cheese price rise to holiday demand. And we’re starting a new month here so there is a possibility that the spot market got a little overheated in October. There’s also the distinct possibility that additional loads of fresh cheese will shake loose now that spot prices are 25+ cents higher than just three weeks ago. And we’ve heard hours of chatter about how many buyers are already well stocked with holiday cheese. But think about this: if the spot market is an inventory management tool of last resort, does it really care about where the lion’s share of buyers covered holiday needs? No - the spot market only cares about the last guy. How much does he need and what price is he willing to pay? We’re about to find out.
If looking at the strength of the spot cheese market lately wasn’t enough to make you scratch your head, the GDT auction yesterday lent a supportive hand to the minds of dairy traders globally. The GDT index rose 11.4% to the highest level since July 2014 on the back of a stupendous 19.8% increase in WMP prices from last event (SMP up 6.5%, Cheddar up marginally at 0.9% higher). When the dust settled, yesterday’s GDT event superseded most expectations by a long shot as weather worries and lower milk production are on the minds of global buyers who are likely not as covered for 2017 as they’d like to be.

We look for a firm opening today, but expect that volatility will once again be a key feature today. Look for the potential for wild swings in the short-term as the market searches for some level of equilibrium.


Class IV, NFDM & Butter

While the fireworks yesterday were clearly on the cheese side of the dairy aisle, NFDM got active in a hurry. Similar issues seen globally befall US NFDM buyers, as many do not have the type of coverage on for 2017 that they would like to. The confluence of lower spot prices, bearish mindsets and a rather unattractive forward curve pricing structure for 2017 NFDM has kept buyers largely on the sidelines. That story may be changing now that global prices are firming – not retreating – as many had expected. We look for a firm trade on NFDM today.

Butter slumped modestly yesterday on lighter volume and mixed emotions. On one hand, the world butterfat prices are strong. This will siphon fat imports from the US and could even tighten our butter outlook in 2017. But the immediate situation seems to show plenty of available butter in the US at the present time. We’ll get holiday shocks to prices as we’ve seen over the past week, but of all the dairy products butter seems best suited to move lower either right ahead of or following Thanksgiving in our estimation. Eventually we may have to deal with a tightening world market, but for US butter that seems to be a distant concern today.

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


Interestingly yesterday we saw weakness in grains, energies and currencies. We read one market comment that called the recent weakness a “TrumpDump” as the markets are not happy with the uncertainty that lay before us next week. Also today’s Fed  meeting may provide a little more uncertainty as most expect today’s meeting will pave the way for a rate hike in December.

Grain markets are recovering a bit this morning from yesterday’s sell-off. In all the recent grain market volatility, both corn and soybeans remain above key areas of support. We believe that those levels of support will be respected and that these markets can once again move higher as they did last week.

Grains are opening mixed.


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