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Morning Dairy Comments, 12/01/2016

Thursday, December 1, 2016


General Market News

  • Crude Oil is up another 2% to $52.60/barrel after OPEC agreed to their first production cut in 8 years.

· Italy’s Brexit moment? https://goo.gl/tpWQd9

· UK Brexit minister says would consider paying into EU for market access https://goo.gl/vrfFoS

· Cash-strapped Chinese dairies selling then renting back their cows https://goo.gl/nou2Nb

· Russia’s pledge to OPEC will mean ‘herding cats’ to deliver cuts https://goo.gl/LK5YNy

SPECIAL NOTICE:

On December 5, the order of spot market sessions is changing. Because spot NFDM will trade electronically, the spot call order is amended as follows:

CHEESE:               10:45-10:55 AM

BUTTER:               11:00-11:10 AM

NFDM:                  11:30-11:40 AM

Please note, this is the first phase of changes. There will be other time changes to the spot sessions once butter is listed on the electronic platform, and then again when cheese is listed – both of which will happen sometime in Q1 of 2017. Please call or e-mail with any questions whatsoever.

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Class III & Cheese

Although domestic demand (holiday and otherwise) continues to be strong from discussions we have, cheese has freed up to come to the exchange for sale. Both block and barrel cheese dropped 2 cents apiece yesterday in what continued a string of weaker spot calls for cheese. Interestingly, however, the class III and cheese futures largely shrugged off the weakness as prices pushed higher by mid-day. In fact, contracts are now at or around their all-time high price levels. February Class III, for example, eclipsed its prior contract high of $16.49 (established back in October 2015) and closed at $16.52 yesterday. Where’s the support coming from?

There are likely several reasons for the strength starting with demand for a cheese price in the mid to high $1.60’s – a price level that appears rather valuable to buyers today. But more specifically we’d tip our hat to the dry whey market of late as a real driving force. With over 220 dry whey contracts changing hands 1-2 cents higher, yesterday was no exception.
Over the past 10 years, the AMS announced Dry Whey price fell between 39.00-41.00 cents just 3.5% of the time. Although it is easily forgotten when prices are lower like they have been in 2016, whey actually spends quite a bit of time over 40 cents. The 10-year price average is just over 45 cents. But the main takeaway, however, is that the 40 cent mark tends to be an inflection point that can not only indicate a material change in demand for the protein (we hear a lot of anecdotal rumblings about China buying aggressively now) – but also tighter margins for some cheese manufacturers potentially implicating cheese production.

It is possible that cooler heads will prevail in December as holiday demand winds down. But the current class III and cheese futures markets – although impressively higher – aren’t riddled with panic. Not yet at least. It seems well supported, technically bullish and somewhat confused. Shouldn’t orders be slowing now? Why aren’t we paying attention to the weaker spot market? We don’t have all the answers just yet, but we do know that the market behavior appears to be pointing towards more strength as we enter the final month of 2016.

USDA-AMS’s Dairy Programs announced the November Class III milk price at $16.76/cwt., up $1.94 from last month and $1.46/cwt. higher than a year ago. The cheddar cheese price average was released at $1.7596/lb., 17.66 cents above last month and 10.93 cents higher than last year. The dry whey price average was up 3.87 cents to 36.90 cents per pound and 13.49 cents above last year.

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

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Class IV, NFDM & Butter

Spot butter ripped 13 cents higher yesterday sending futures through March 3 ½ to 5 cents higher. The Feb 17 contract being the only one settling limit up on the day. The additional loads of cream made available during the holiday week have seemed to have dried up. Spot may have over shot itself at $2.23, as inventories and production remain strong. This feels like more like a market participant in need a few additional loads in order to cover the last minute holiday push.

A higher crude market has fostered optimism for the bulls in the larger commodity sector, included NFDM. The chart below shows a historic comparison between NFDM and Crude. What’s interesting to note is the lack of a time delay between the two markets. Like crude though, NFDM has an inventory problem that it is eventually going to have to deal with. In both markets this rally should be limited, as fundamentals take hold. 

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The butter price average of $1.9092/lb. was 4.55 cents above last month, but 89.07 cents lower than last year. At 91.19 cents per pound, the nonfat dry milk price average was 1.03 cents below last month, but 7.47 cents higher than last year. The Class IV milk price was $0.10 higher than the previous month at $13.76/cwt., but $3.13 less than a year ago.

We look for a higher open this morning for NFDM, Butter and Class IV.

Grains

Grains are opening mixed to start the month of December. Weather is rather benign here and in South America for the moment allowing traders to focus on the supply side of the equation. But the crude oil market is back in action again today up another 1.5% and the US dollar is succumbing to some sell side pressure, which may help corn and soybeans find support by mid-day.

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Grains are opening mixed.

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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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