Morning Dairy Comments, 01/10/2017

Tuesday, January 10, 2017

General Market News

· Storm to exacerbate California flooding into Wednesday

· U.S. dairy groups react to dairy cutbacks in USDA WIC feeding program

· U.S. ready for new trade deal with Britain under new administration

· China factory prices rising fastest in 5 years adds to reflation

· Libya ramps up oil production, threatens OPEC plans



Class III & Cheese

Class III futures bubbled up yesterday on the back of no spot cheese activity. This bounce higher on Class III may be partly due to profit taking after a steady decline the past few weeks (open interest was slightly lower in nearby contracts). Demand from retail and food service cheese customers appears to be good generally, although there are pockets of slowdown here in the first few weeks of 2017. Pizza cheese orders are in line with seasonal expectations for the football playoffs. Although it was concerning in November with Cheddar production up a whopping 5.9% while mozzarella was only up 1.6%, which may stem from the wide Class III/IV spreads during that time. Domestic cheese prices are more in line with stable international prices which will inhibit excessive imports landing into the US.

Ultimately, the class III and cheese futures markets appear well supported but lacking panic buying at current. It seems to us that the price action over the past month is likely a correction within a bull market.

The strength of the dry whey market continues to be significant as the Jan-June whey futures have tacked on a dime over the past 2 months (see chart below). The recovery in the whey market started off earlier in the year with the EU diverting milk from the cheese vats to the dryers to pile powder into intervention. Simultaneously Chinese buying has been impressive with YTD total whey products imports up 16%. Mexican demand for dry whey continues to be strong.

It’s also apparent the demand for WPC’s has been notable as well. Last week Dairy Market News reported central mostly dry whey prices up 2 cents to 41 and western mostly up 3 ¼ cents to 44 3/4. With the sharp move higher it is apparent end users are not well covered out there. WPC34 has been very tight with a consistently lower production over the past 2 years. The economics of making WPC34 and lactose has greatly improved since 2015, but this recent rally in dry whey has once again put WPC34 and lactose at an economic disadvantage, and will inhibit significant production increases. WPC34 has much more room to the upside especially with the recent move higher in NFDM.  

We expect Class III, Cheese and Dry Whey to open steady-higher.



Class IV, NFDM & Butter

The spot NFDM got hit yesterday trading down 3 ½ cents to $1.01 ¾. Domestic end users still question the strength in the market, and are mostly hand to mouth outside of contracted volumes. CWAP ending the week of Dec 30th showed volumes of only 3.47 million pounds, watch out for tonight’s numbers on yet higher prices. The world’s largest dairy tender, Algeria’s ONIL, was ongoing last week and WMP values are penciled around $3,450 delivered from Oceania. SMP business is around $2,450 delivered from the EU and US. The chart below shows WMP exports from NZ to Algeria. YTD to November the Kiwis have sold 145k tonnes vs 115k in 2015 and 83k in 2014 (see chart below). 

Butter is still hot. The spot session was up 8 cents to $2.30 on 4 trades. Like last January we are going against seasonal norms of lower fat prices following the holiday demand period. End users have rather quiet so far this January but still appear somewhat uncovered for much of 2017. Butter production in California during November was down 7.5% from last year while inventories had a huge drawdown as evidenced in the cold storage report. On the surface, the USDA numbers still look hefty relative to prior years. Although butter lives in a different world - reinvigorated by consumer sentiment towards dairy fats in the US diet - today. So stocks may be tighter than you would think especially if we are still carrying over imported AMF in those numbers.


We look for NFDM, Butter and Class IV to open modestly higher.


Corn had a choppy to higher day yesterday with the index funds driving the strength. They are estimated to need to buy between 50k to 100k additional contracts over the typical roll period this week to reposition their portfolios. Traders are also positioning for the Jan 12th USDA report- (Trade estimates below). Export inspections were impressive again at 876k tonnes. Loadings to date are 7.9 million tonnes above last year and well above USDA’s estimates.


The soybeans market continues to dial in on South American weather with concerns of wetness in Arg and dryness in northern Brazil, although the 6-15 day models are improving. The yield in the USDA report is expected to increase by .2 bu/acre to 52.7 or within 0.1 bu/acre of FCStone’s Nov crop survey. Export inspections were 1.457  million tonnes above the trade estimates. Loadings are on pace to meet USDA’s annual estimates, and are 5.2 million tonnes above last year’s pace.


We expect grains to open slightly lower. 


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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