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Morning Dairy Comments, 12/22/2016

Thursday, December 22, 2016


General Market News

· ‘Sign of recovery’:  Dairy crisis is nearly over says EU commissioner https://goo.gl/Fz1iqF

· Dollar dips but long-term rally still seen in play https://goo.gl/C9AF7G

· Crude oil prices dip on rise in U.S. stocks, Libya output boost  https://goo.gl/9ivGAN

· Cashflow overhang on Irish dairy farms still a concern https://goo.gl/POvmSI

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Class III & Cheese

Following a modestly bearish US milk production report, sellers swept the legs out from under nearby Class III futures. But the key driver yesterday was spot weakness. Blocks offered 8.5 cents lower to $1.70 and barrels trade a single load to within proximity of the December lows, to $1.5675. Action was tepid (perhaps a neutral response to milk production) leading up to the spot call, with futures holding at technical levels of support. Volume exploded thereafter with nearby contracts breaching those support levels without looking back and by the time the dust settled, the trade was looking at losses between 20-40 cents in the January-March timeframe.

As extreme as the pullback sounds, we’d be remiss not to point out that no material chart damage was incurred on the downdraft, leaving the bullish trend intact and the Q1 timeframe resting on its 20-day moving average at $16.85 (blue line on the chart below). That said, any follow through pressure from these levels has the potential to call into question whether a larger correction is in the offing, which would drive price action back along the $16.00 corridor, where quite a bit of congestion occurred back in November.

Shifting attention away from the Q1 timeframe, price action in the back half of the year has to be respected as contracts from July-December traded firm, unwilling to stray more than a nickel from either side of unchanged. Keeping some level of risk premium in deferred contracts makes sense, but it’s also a shift into ‘contango’ or a cost-of-carry structure. That type of structure is typically bearish in nature, but with the global unknowns out there today, it is just too early to make a long-term bearish call for milk right now.

The trade will get a look at the latest cold storage numbers from USDA tomorrow morning where we expect stocks of American and total cheese to move along seasonal lines and come in higher versus their five-year averages. We’re forecasting American cheese stocks to lose 1.4% from last month, but rise 2.8% from 2015 levels, while total cheese stocks for November should decrease 1.5% from a month ago, but expand 4.3% above year-earlier levels to 1,197.4 million pounds. November’s total cheese stocks have been lower than the previous month’s level in 8 of the past 10 years (full breakout below).

For the week ending December 17th, the National Dairy Products Sales Report saw blocks shed a nickel, to $1.83 on decreased sales volume of 13,573,837 million pounds and barrels follow suit, falling 4 cents, to $1.69 on steady sales volume of 12,247,325 million pounds. Dry whey gained a penny to 0.4030 on steady sales volume of 6,360,381 million pounds.

January-March Class III~Daily

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

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Class IV, NFDM & Butter

Class IV saw support and in some cases posted double-digit gains on the back of continued butter strength, which saw contracts through 2017 track in the green despite a slight pullback on spot, to $2.2050. The bullish price action witnessed over the past couple of months has been impressive as the market reacted to strong demand that has pulled product across both our northern and southern borders and pushed the spot price to near $2.25. That said, futures feel a bit toppy here and are in overbought territory, which could lead to a similar performance to what Class III saw yesterday.

NFDM futures trimmed back a bit on a steady spot call as sellers remain active at technical levels near the upper edges of the range despite the spot price holding north of the $1.00 mark. Here too, the bullish trend remains intact, as there is plenty of support to the downside and will likely require spot to slip back below the $1.00 threshold to embolden the bearish camp much further. 

For the week ending December 17th, the National Dairy Products Sales Report saw butter post a fractional pullback to 2.0974 on slightly decreased sales volume of 3,753,284 million pounds while NFDM gained over a penny, to 0.9671 on steady sales volume of 15,596,958 million pounds. 

We look for a steady to higher opening for NFDM, Butter and Class IV.

Grains

Grains traded mixed with beans holding technical levels along the $10.00 mark while corn and wheat trimmed back 3-4 cents, all on light volume as the trade enters "holiday mode". Demand remains sufficient and while the weather picture in South America has turned friendlier, there is still quite a bit of time on the clock before traders will put the crop to bed and take out additional risk premium. See below for estimated export sales, which are scheduled to be released this morning.

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Calls are for Corn and Wheat to open 1-2 lower, Soybeans 5-8 lower.

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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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