Dairy Comments, 11/18/2016

Friday, November 18, 2016

General Market News

· Fonterra increases 2016/17 forecast farmgate milk price by 75 cents to $6.00/kgMS

· EU proposes to tender SMP Intervention Sales

· Trump offers attorney general job to Sen. Jeff Sessions

· The euro is on its longest losing streak ever

· Crude Oil Rally loses steam on Hawkish Yellen Comments (rate hike probability now stands at 96% likely)

· Most Thanksgiving travel expected since 2007, AAA says


Class III & Cheese

Class III and cheese futures pushed higher yesterday as the reticent gives way to respect for the spot market scenario. After an eerily quiet week, yesterday block cheese found a bid and traded up 1.25 cents to $1.8975. Not to be ignored, the barrel market actually traded 1.75 cents lower intra-session before catching a bid by the end that pushed the price back up 1.5 cents to settle down 0.25 on the day. In other words, although there are fresh barrels available for sale - the buy side interest is not going away. The overall behavior of the market suggests that more spot market price strength may very well be in the cards in the very near term. It is not unusual to see spot cheese prices weakness after the holiday rush, but for now fresh block cheese remains tight and we won’t rule out a rally on barrels to catch up.

Dry Whey remains well supported in the high 30-low 40 cent range right now. The Central Mostly Dry Whey powder price was up 0.50 cents from the previous week at 35.00 cents, while the Western Mostly price was 0.25 cents higher at 37.75 cents. While we don’t expect a sharp rally for dry whey, but rather a mixed to slight firm trade from current levels for now.
We're looking for more milk in today’s October USDA Milk Production Report to be released after market close at 2pm Central. We expect October milk production in all 50 states to come in at 17.5 billion pounds, up 2.3% from a year ago. In 2015, October output was 0.3% higher than October 2014 at 17.1 billion pounds. U.S. milk cow numbers are projected to be 21,000 head higher at 9.341 million head and for output per cow to be up 38 lbs. at 1,876 lbs. On a month-to-month basis, October's output per cow should lose 0.1% on a daily basis, while cow numbers will be up 0.03%.

For the week ending November 5, dairy cow slaughter under federal inspection was down 2.99%, at 58,500 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.7% lower than 2015 levels, with 2,478,900 head slaughtered.

We look for Class III and cheese to open firm, dry whey steady to higher.



Class IV, NFDM & Butter

EU proposes to tender SMP Intervention Sales

In a surprise move, it’s been announced this morning that the EU Commission are proposing the first sales of SMP from EU Intervention. SMP Intervention stocks stand at 334,551 tonnes and the EU is proposing to allow eligibility for 21,150 tonnes to go to tender, SMP stock that was in storage as of 1st Nov15. This will go onto the agenda for the meeting of the 24th November and if passed the first tender is planned to take place on the 13th December. The majority of the SMP that would be eligible is in Belgium, Lithuania, Poland, Ireland, France and the UK, which make up 20,235 tonnes of the total and we estimate that the average age of the stock is currently 465 days. The EU tender process sets a window for companies to supply tenders for a volume that they will buy and the price. The EU then assesses the tenders and chooses what overall volumes or price levels they will accept and are under no obligation to sell any product in a given tender.  

The net effect of the EU Commission’s proposal for today has less to do with the details of the intervention stocks tender and likely more to do with end-user sentiment. Buyers may breathe a sigh of relief with this news and it could mitigate buyer worry in the short-term and even flatten prices. In our opinion, however, building intervention stocks is bearish – removing intervention stocks is not. If they’re able to move stocks out of intervention, they’re able to do so because there is a bid for product.

Class IV futures were driven higher by the bullish tandem of butter and NFDM as spot activity ignited trading activity. Class IV futures settled between unchanged and 22 cents higher, with the strongest gains tallied in the nearby months, as over 100 contracts changed hands.  The strength of international prices combined with holiday demand have driven values higher recently.

The trading activity within the butter complex was contained within the December through June contracts as buy side hedging interests compete to secure coverage amidst strong international prices, surging NDPSR values and the onset of the holiday season.  The December through June contracts gained between 0.025 and 3.050 cents after an active spot session that saw a total of nine loads traded.  As hedgers continue to seek coverage for the early 2017 months amid tight cream supplies expect the strength of the butter market to remain for the near term. 

NFDM futures trading activity was contained to just the December through March contract months, with the December through February months postings gains of between 0.275 to 1.225 cents, as market participants reacted to the uptick in the spot value. Global WMP prices grinding higher have played a part in the strength of the NFDM market while the inventories of SMP in Europe will act as counter balance to this strength in the months to come.  Domestically speaking the NFDM market looks poised for additional strength in the near term. 

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


Corn futures were lifted higher during yesterday’s trading session as the impressive weekly export sales figures reported in the prior to the open drew speculative buy side interests into market.  The weekly export sales were reported at 1.661 mmt, nearly double the volume during the same week last year, with commitments to date now 13.1 mmt ahead of last year’s sales pace (See graph below).  Since the cutoff date for the reporting of these figures significant developments have transpired around the globe, with the surge in the value of the Dollar posing the greatest threat to future demand and sales to our biggest trading partners.  Funds were thought to have bought 13,000 contracts on the day, cutting their short position to just 27,000 total contracts.

Soybean futures benefited from the buying efforts of speculative funds, providing limited gains in the futures contracts.  The weekly export sales were reported at 1.419 mmt, within expectations, while commitments are running 7.6 mmt ahead of last year’s pace.  Brazil’s January cash offers fell to a steeper discount to U.S. prices yesterday.  With market projections calling for a significant shift in crop acreage from corn to soybeans next year South America will be looked to for inspiration for bullish price action for next year.  Funds were estimated to have bought 8,000 soybean contracts, 4,000 meal while selling 6,000 bean oil during the session.

Wheat futures were caught up in the same speculative buying spree with funds covering 7,000 of their short positions, which now stands at 133,000, as export sales were reported near the top end of expectations at 598.4 tmt.  Total commitments are still estimated at 3.94 mmt above last year, yet still well behind the USDA’s projections.  Buy side interests are counting on demand for U.S. wheat for blending needs to bolster values in addition to a potentially smaller winter wheat crop. 

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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