Morning Dairy Comments, 11/04/2016

Friday, November 4, 2016

General Market News

· Dairy prices predicted to increase despite record US production

· Australia’s dairy exports up 8.2% in September on volume basis

· U.S. employment growth solid, wages jump in October

· Saudi former oil minister says OPEC can’t cut output by itself



Class III & Cheese

Class III futures extended their bullish run yesterday closing higher for the eighth consecutive day as the march higher for spot cheese values continued. Both blocks and barrels now sit with a $1.80 handle on them and though the futures have gone parabolic to the upside, they continue to lag the spot equivalent, which currently comes in near $17.50. The trade is taking a “prove it to me first” approach and remains skeptical of the sustainability of the price move. That being said, the structure of the market is now clearly backwardated (spot is the highest price on board) or inverted from a more typical cost-of-carry structure. As we’ve said before ad nauseam, such a forward curve structure is bullish for a commodity market – any commodity market – and dairy included.

As far as the fundamentals are concerned, there are longer-term bullish implications rippling under the surface with international prices on the rise and a global contraction in the milk supply. We’ve even heard upper Midwest milk production has slowed somewhat. That being said, milk continues to flow here at home and exports are less than stellar due to a strong greenback. This latest push higher likely prices domestic product out of the market unless the USD comes under pressure—a dynamic that’s not likely to happen so long as interest rate hikes are still on the table. Also factor in that the recent bullishness can in part be chalked up to seasonal demand, that leaves the downside vulnerable in the short run once buy side interest has been satisfied.  

Take a look at the chart below, which we featured earlier in the week, commenting on the bullish pattern. The points of interest here would be the inverted head and shoulders pattern established with the head being the October low and the shoulders being the areas of congestive trade in late September and, more recently the flagging action seen just prior to the rally. We now see the 10-day moving average eclipsing all major moving averages, as indicated by the yellow line ramping up through all of the other colorful lines with the exception of the 100-day moving average, which comes in at $15.90 (aqua line). All of those moving averages will act as support on price breaks. There is now an ascending trend line to boot (black line).

December Class III~Daily


The USDA-NASS Dairy Products report for September shows output mostly lower versus expectations.  American cheese production was in negative territory for the seventh month out of nine this year. Production of other cheese was in positive territory for the twentieth time in twenty-one months. Total cheese production is on a 41-month streak of gains. September production posted a 1.6% year-over-year increase at 981.2 million pounds, which is 71.8 million pounds higher than the five-year average. American cheese production lost 0.3% to 378.3 million pounds, which was 21.9 million pounds above the five-year average. Year to date, total cheese production is 1.6% above the comparable period a year ago on a daily basis, and American cheese production is 0.5% lower on a daily basis.

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



Class IV, NFDM & Butter

NFDM futures encountered stiff resistance after posting gains over the past few sessions as the spot price slipped 2 cents on 4 trades to $0.87. For the time being, the market has shrugged off the impressive spike on GDT and remains squarely focused on the fact that the spot price at the CME has been unable to muscle up through the $0.90 mark, let alone push towards $1.00. Without a change in that dynamic, traders will continue to step in and pressure prices at technical resistance levels, as was the case yesterday. NFDM output was higher on the Dairy Products report, up 4.7% to 125.6 million pounds. Skim milk powder (SMP) output was higher, up 43.3% to 38.4 million pounds. NFDM output was 26.8 million pounds above the five-year average, while SMP was 1.8 million pounds lower.

Butter futures have also shed value of late as the spot price continues to erode, trading a single load 3 cents lower, to $1.86 yesterday. The market is not in full-blown meltdown mode but it is unquestionably soft with a test of the $1.85 mark on spot likely in the offing in the coming sessions. We may witness a bit of a bounce if that level is breached to due last minute bargain hunters, but the longer-term picture is becoming more skewed towards downside. According to the Dairy Products Report, butter production was lower for the first time since October 2015, losing 0.4% to 133.1 million pounds, 1.3 million pounds below the five-year average.

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


Grains traded mixed yesterday with corn and beans picking up 2-3 cents while wheat shed a nickel as the complex continues to drift sideways amidst harvest pressure. Export sales were strong for corn and beans, which is countered by the massive crop coming online. Spreads are starting to look weak and with basis levels slipping there's a good chance they'll widen out even more from current levels. The trade will continue to focus on the supply/demand relationship but will also keep a finger on the pulse of weather conditions in South America as their planting season is underway. Any issues from a production standpoint down there will have a direct impact on the domestic balance sheet as there's little margin for slippage.


We look for Corn to open 1-2 lower, Soybeans 2-3 lower and Wheat mixed.

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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