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Morning Dairy Comments, 12/23/2016

Friday, December 23, 2016


General Market News

· Cold Storage report at 11am Central

· Putin says Russia will cut oil output, cooperate with OPEC as planned https://goo.gl/HGc1h1

· European stocks stem losses; Italian aid lifts bonds https://goo.gl/0xkikA

· CP Foods completes Bellisio acquisition https://goo.gl/yFVnNr

· Milk powder prices may reach new heights in 2017 https://goo.gl/y0RgPo

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Class III & Cheese

The holiday trade is here in the form of subdued volatility, but trading volume remains robust for Class III. We’ll characterize yesterday’s trade as being dominated by controlled short covering for Class III futures. Prices bounced 2 to 11 cents higher on 1,745 trades, but open interest fell by 193 contracts. After sharp declines earlier this week, some traders likely took yesterday’s stable spot market tone as a cue to exit short positions. Block cheese gained a penny and barrels traded 3 cents higher intra-session before settling back down to unchanged on the day.

Cheese futures saw moderate volume of 339 contracts and an increase of 215 contracts in open interest. Much of that increase was concentrated in the second half of 2017 contracts where there is likely more commercial hedge activity still at play. Ultimately cheese futures appeared well-supported yesterday, but lacking any type of rally-inducing chutzpah.

Option activity was healthy with over 2,400 class III and 900 cheese options changing hands. Although more cheese calls than puts traded yesterday, class III put volume outnumbered calls by more than 1,000.

Speaking of options, we’ve written several times that class III and cheese markets are in a corrective pattern after a big rally earlier this month. Now option activity may begin to provide a modicum of evidence for this. There’s been a trend of rising put option open interest growth for both class III and cheese over the past month – and certainly the past week. This dynamic suggests that market participants are more concerned about downside than upside.
We’ll cover options in more detail next week. For today we wanted to say that although producers ought to take opportunities like the one presented during December’s price rally to secure profit margins, the contrarian in us would say that the market will move in the opposite direction of where most people have coverage (at least for a while). If this simple idea has any truth to it, option open interest points to higher prices yet to come.
Dairy cow slaughter has eclipsed the 60,000 head for the second week in a row for the week ending December 10. December marks the first time since mid-March we’ve seen a weekly number at or above 60,000 head. Perhaps inclement weather is the culprit. With the gain in cow numbers during November, perhaps rotating out some inventory to make more room in the barns. Also could be some cash flow and tax decisions coming into play. Whatever the case, we’ll be sure to keep a close eye on slaughter rates as we head into a 2017 when more cows will be taken off rBST (which could also positively impact cull rates).

Official dairy import numbers from Chinese government for November we’re released overnight. They are a little stronger than we would have expected, but overall, nothing strikes us as really surprising.

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We have a shortened trading day today (markets close at 12pm Central) for the Christmas holiday. We look for steady/firm class III and cheese early and perhaps to close out the week. Dry whey is firm this morning.

Cold Storage Estimates

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Class IV, NFDM & Butter

Thursday was a mixed bag for NFDM and class IV futures, but butter remained on its overall march higher. And NFDM may be right behind. Spot NFDM pushed 3 cents higher to $1.05 – another new 2016 high price print. The cash price of powder has now clearly busted through at least one level of trend line resistance, re-tested that trend line and is now advancing to the upside as you can see below.

Weekly NFDM Spot Chart

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The risk here seems to us to be not up or down – but how high and how fast. Markets tend to accelerate once a better-defined trend is established.

We expect November butter stocks to be 42.96% above 2015 inventories at 189.8 million pounds. November’s expected stocks level would above the five-year and 10-year averages. Month-to-month butter stocks should show a 16.7% decrease. Last year, October-to-November holdings were 25.8% lower. October-to-November butter stocks have decreased in 10 of the past 10 years.

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

Grains

The slow pre-holiday trade continues in the grain complex. Better South American weather and moderate concerns from outside markets continue to promote a choppy, somewhat weak trade in the grain complex. Nearby soybean contracts look mixed but technically weak for now.

Calls are for Corn, Soybeans and Wheat to open mixed.


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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