General Market News
· Long awaited Federal Reserve meeting today and tomorrow
· Fonterra to expand mozzarella production with new plant https://goo.gl/6P1rTw
· Deep freeze to invade central, east US this week https://goo.gl/UrF6cf
· OPEC deal to create oil-supply deficit first half of 2017, IEA says https://goo.gl/7jeQXx
· Merkel, Hollande back extending sanctions on Russia over Ukraine https://goo.gl/UJzdWn
· USDA reports 2016 farm profits https://goo.gl/eqIG56
Class III & Cheese
Houston…we have lift off. That’s what it felt like yesterday as Class III and cheese futures rocketed to the upside with another bullish wave propelling nearby contracts limit higher in some instances on broad-based buying that extended well into 2018. Volume was impressive at over 3,600 contracts and while the lion’s share changed hands from the December-June timeframe, steady buy side interest boosted the deferred timeframe as well with end users likely extending coverage in a market that has offered few opportunities to “buy the dip”. The bullish stars are aligning with global milk contraction pairing up with firming international prices and solid demand. Nonetheless, the trade has gone from the “show me first approach” it had adopted just a couple weeks ago where futures traded at a discount to the spot equivalent to the current premium to spot equivalent, which is now pegged near $16.50. Futures are likely now dragging spot prices north, which is what we saw that yesterday as the spread between blocks and barrels converged to 10.25 cents on the higher move. Seasonal holiday demand is good, but the only thing this rally has in common with seasonality is the demand for futures and forward prices as budgets are typically set before Jan 1.
On the other side of the aisle, farm selling picked up yesterday. Dairy farm margins are improving nicely this December. Although the market is acting bullish and our opinion of prices is rather bullish, don’t fall asleep at the switch. Make sure to be watching these markets and looking for opportunity to slide floors underneath the market or forward price percentages of your milk production at reasonable levels. Call us with any questions.
It’s not just the fundamentals that are driving the market to fresh highs. Technical aspects lining up as well with nearby contracts probing along levels of support on last week’s downdraft but were unable to breach those levels in any material way. This kind of price action has occurred numerous times over the past couple of months and in each instance, futures went on to advance after failing to take out those support levels, indicated by how prices repeatedly bounced off the yellow line (10-day moving average) on the way up (see chart below). The nearby January contract did match the December 2nd high of $17.30 yesterday, which does open the door to possible double topping action, but that feels a bit of a stretch based on how solid the yesterday’s move was.
January Class III - Daily
We look for Class III and Cheese to open steady to slightly higher.
Class IV, NFDM & Butter
Class IV remained buoyant based on firm price action from its components however it lacked the conviction that Class III saw and only posted mild gains, which worked to boost the spread between the two by double digits. Butter futures did find traction with the spot price advancing back to $2.08, in what could lead to a test of the $2.10 mark in short order. Futures have been under pressure for the past week or so and were driven back to levels of technical support as well, which held yesterday as evidenced by the black line closing above both the yellow and blue lines, which represent the 10 and 20-day moving averages for the Q1 timeframe on the chart below.
It was a mixed affair on the NFDM side of things with nearby contracts slipping a bit while deferred months advanced, all on light volume. The trade is at a crossroads here as much of the bearish aspects out there have been factored in however the spot price continues to fail at the $1.00 mark. Yesterday’s fractional slip on the spot market did little to inspire either side of the trade as futures continue to cling to technical levels of support, waiting for a price signal to move one way or another. It may get that signal sooner than later when the results from the EU intervention tender becomes known, as roughly 6% of stocks or about 22,500 metric tonnes will be offered back onto the market today. The question will be how quickly those volumes are snapped up and at what price? At the end of the day however, we feel that this development has longer term bullish implications in that prices needed to rebound to levels where it made sense to unleash product and that demand would also have to be sufficient enough to warrant the tender in the first place.
We look for NFDM to open slightly lower, Butter and Class IV mixed.
Grain markets traded on both sides of unchanged as traders continue to balance a slightly bearish report from USDA last Friday against weather developments in South America, where Brazil received some beneficial rainfall in certain areas that were deficit however persistent dryness is forecast to remain an issue with Argentina. This is still a developing story that needs to be watched that will have bullish implications moving forward as traders will begin chatting about yield reductions. At this juncture though, the trade seems fairly content to hover around technical areas of interest until the South American picture comes into better focus as evidenced by the chart below, where January beans remain right near its 10-day moving average (yellow line on chart below).
January Soybeans - Daily
We look Corn to open mixed, Soybeans 3-5 higher.
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