Morning Dairy Comments, 01/18/2017

Wednesday, January 18, 2017

General Market News

· Food prices fall for 5th year in a row, dairy index up 3.3% in December

· Rising U.S. shale-oil output threatens OPEC’s production pact

· U.S. lifts embargo on French beef imports

· Drought-to-drenched California faces water balancing act



Class III & Cheese

It didn’t take long for the trade to digest the results from the latest GDT auction, which came in 0.6% higher overall and saw cheddar prices tack on 1.3%, to a $1.78 USD equivalent (full breakout below). Move along…nothing to see here!

And so it went as we opened a shortened week of trade, with Class III contracts pushing to the upside early on but reversed course after a soft spot call brought out the sellers and drove most contracts back to within a dime of unchanged. Most of the forward curve continues to hover just north of initial technical support levels with traders showing a reluctance to push prices too hard in either direction, hence the ongoing consolidation which pegs the nearby February contract at a slight premium to the spot equivalent, which comes into today’s session near $16.80.

You really can’t read too far into yesterday’s price action with rather compressed intraday ranges on light volume reflecting more complacency than anything else. We do get the feeling that end users are a bit light on coverage through most of 2017 outside of the Q1 timeframe and are likely waiting for a dip in the market to initiate/add to coverage.

It’s also quite plausible that there are just too many unanswered questions out there at the moment to spark aggressive price action in either direction. Where is global milk production headed from a balance sheet standpoint? Will the USD remain under pressure and provide a shot-in-the-arm to our export market? Those export tallies from last month did show some promise but that’ll need to become the trend and not just a passing fad. How will markets at large react once the Trump administration is inaugurated and will tensions with China ramp into a trade war? Will South America produce a grain crop sizeable enough to remove concerns and keep prices low? Until there are some answers to these questions and the bigger picture comes into better focus, price action could remain muted for a bit. That said, these consolidation periods quite often lead to breakouts and the fact that prices have held in the upper area of the range amidst all of these unknows is rather impressive as markets typically don’t like uncertainty.    

We expect class III and cheese to open lower for the day, whey steady.


Class IV, NFDM & Butter

Class IV opened the week on firm footing as its components saw divergent price action. Butter futures advanced on a firm spot call that saw a couple loads trade back to $2.24 but still likely needing to push north of the $2.25 mark to see follow through. Futures continue to cling to technical areas of interest and trade in close proximity to the spot price, which will add to volatility in the coming sessions. We continue to hear of ample availability for cream across the country which have many scratching their heads as to how resilient prices have been however, the rest of the world remains short on fat and with deficits in milk production, that could keep the yellow giant well supported above the $2.00 mark.

A steady spot call did little to offer support to the futures as sellers stepped in on the heels of downdrafts in WMP and SMP on GDT, which fell 0.1% and 1.6%, respectively. Volume was solid and fairly well distributed through the Q3 timeframe, with 21 trades logged between 117.500-118.000 for the July-September pack alone. Many contracts are testing technical support levels and in some cases have breached them, which could lead to accelerated selloffs in light of the soft GDT showing and the spot price showing little conviction for an upside breakout at the moment.


We look for NFDM to open lower, butter higher. 


Grains bolted out of the gates to start the week as overnight strength spilled over into the day session yesterday led by a surge higher in soybeans. Traders continue to search for a bullish story to make a case on and for the time being have found one in the South American weather situation coupled with strong levels of demand. Export inspections for beans exceeded trade estimates and areas affected by continued rains in Argentina 

Are facing planting delays and production concerns. There’s also some chatter that the weather pattern will flip into a La Nina by next summer, which would impact our growing season and threaten production. NOPA crush numbers did miss expectations and came in at the low end of expectations, but that had little impact on yesterday’s price action as fund managers are taking no chances here and aggressively bought corn, wheat and beans as reflected in the chart below, with estimated totals coming in at 15k, 6k and 10k, respectively. 



We expect the grains to open lower.

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