Morning Dairy Comments, 12/08/2016

Thursday, December 8, 2016

General Market News

· ECB surprises by ‘tapering’ its massive bon-buying program from next April

· Fonterra launches new UHT range in China

· Glencore and Qatar buy $11.3bn stake in Russia’s largest oil company

· The Trump Administration announced that its new EPA head would be the Attorney

General from the State of Oklahoma – Mr. Scott Pruitt

· Starbucks’ 5-year plan will drive the growth the company seeks



Class III & Cheese

Wednesday brought with it a mixed and a rather resilient trade for class III and cheese. Mixed because a good two-sided trade occurred as over 1,000 class III and 330 cheese contracts traded in a tight range (most trades occurred within 10 cents of unchanged for class III and a penny for cheese). Resilient because futures were somewhat buoyant in the face of continued spot market weakness.  Perhaps the dry whey market, which was most unchanged to slightly higher yesterday, lent some support to the class III market. But why were cheese futures mostly steady to modestly higher? Surely they should have seen more weakness, right?

The answer is not so simple, but to boil it down we think that the futures trend has changed for class III and cheese. Both class III and cheese markets are trending up. And the past few days ought to be viewed as a market correction from last week’s barn-burning rally rather than some massive reversal back into a bear market. Outside of charting price patterns and levels of support, one less scientific way we draw this conclusion is that sell side pressure is losing steam even as spot cheese prices edge lower. The market likely got a bit ahead of itself last week and is now correcting that action and waiting for the windsock of market direction to kick up again.

Also the news hasn’t changed much since last week.
The US dairy supply/demand balance sheet – on its own – looks mostly bearish. It appears we have plenty of milk in most key cheese producing regions and plenty of cheese in the coolers. But we’re seeing multiple months of negative growth in nearly every other major milk-producing region. Working out what that really means for prices will take some time, more information and a good dollop of risk premium to the futures forward curve. If, for example, New Zealand milk production is down 3% for the season, perhaps $16 milk makes sense. If New Zealand milk production is down 7%, perhaps $19 milk makes more sense. With this type of uncertainty (and this is just one example), futures markets may have a tough go at pushing much lower for an extended period at present.

While most of the holiday buying should be squared away, reports of 2017 cheese demand remain strong. Block demand seems to be a bit more robust, which is not surprise, from a seasonal perspective. However, what is a bit surprising is the spread between blocks and barrels, which now stands at 14.5 cents. The 14.5 cents is now 2-3x greater than the historical average and has people asking the question …why? It seems that this is more of a supply-side issue. We have a great displacement of milk, with the upper Midwest and NE sections of the country producing more than it can process.  We know there are not many plants that can switch between barrels / blocks and the plants that have the capacity (in other portions of the country) lack the flow of milk.

NDPSR, for the week ending December 3rd, reflected an increase of 1.9 cents, from the previous week, in blocks to average $1.91.  Barrels averaged $1.79, a decrease of 0.2 cents from the previous week.  Dry whey averaged 38.3 cents, an increase of 0.6 cents.

In other news, CWT has accepted requests for export assistance to sell 1.785 million pounds of cheddar cheese and 220,461 pounds of butter for delivery in the December 2016 through March 2017 time period.

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

Class IV, NFDM & Butter

NFDM saw values decline slightly yesterday; however, these declines were centered in the 1st half of 2017.  NFDM values declined anywhere from UNCH to -1.375.  Butter also saw declines with values slipping as much as 2 cents in nearby February.  Butter seems to have shrugged off the recent export report with the February contract now slipping nearly 7 cents in the last week. Though declines after the holiday period are expected, there is a building concern over butter prices heading into next year. Perhaps the post-holiday weakness we all take as gospel is not in the cards this year as fat prices the world over remain strong. For now, however, we look for a mixed to lower start for butter/powder today.

NDPSR, for the week ending December 3rd, reflect an average price in NFDM at 92.6 cents, an increase of 1.0 cents from the previous week.   Butter averaged $2.04, an increase of 4.3 cents from the previous week.

We look for a mixed opening for NFDM, Butter and Class IV.


Grains remained mixed overnight with corn values gaining a little ground on soybeans (corn up about a penny, soybeans down 5-7 cents). We have a USDA crop report out tomorrow, which will likely prompt a good two-sided trade today for grains as traders square up positions before tomorrow. Pre-report expectations below.



Calls are for Corn to open mixed, Soybeans down 8-10 cents.


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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