Morning Dairy Comments, 01/24/2017

Tuesday, January 24, 2017

General Market News

  • ***Milk Production & Cold Storage reports released this afternoon***
  • UK supreme court rules Theresa May must get lawmakers on board with Brexit plan
  • A number of earning reports will be released this week which seemingly has the Dow on hold start the week



Class III & Cheese

The spot cheese market was hit lower yesterday as blocks fell 4 ¾ cents to $1.65 on 5 trades while barrels fell 3 ½ cents to $1.50. The front month Class III futures were hit the hardest, but they bounced off trend line support late in the session. The Q2 Class III futures shed 12 cents to settle at $17.64, which remains a big premium to current spot values which are right around the ~$16.00 mark. Seasonally speaking cheese demand is tapering off, and the block tightness we have seen over the past few months is fading. Although barrels remain at a steep discount as the market is pricing in ample current supplies, and is anticipating an increase in barrel capacity. See the chart below showing the block-barrel spread.

The dry whey futures continue to stay firm and overnight 20 Q2 packs traded at 49 cents, while Q3 traded 25x at 49 ½ cents. The strength in the whey market was a big contributor to the Class III rally, although we are expecting that market to start losing some steam. A good friend once said to me you need to keep feeding a bull market. With dry whey futures looking expensive relative to the WPC34, WPC80, and NFDM markets we could see a pullback on the futures. Maybe it’s time the bull takes a breather.


April-June 2017 Class III Futures:


We expect class III and cheese to open mixed with dry whey steady.


Class IV, NFDM & Butter

The first day of the electronic spot trading for NFDM ended with 2 trades settling ½ penny lower to $1.00. This is the first time we’ve seen the $1.00 mark since December 15th on the spot session. The NFDM futures fell across the board on good volume of 267 trades. The NFDM cash market has not showed any strong conviction of extending the bull move. End users remain reluctant to chase the market higher. The sharply weaker Mexican Peso against the USD continues to concern the market on Mexico’s ability to sustain their strong importing pace from the US.

The spot butter market was softer and futures followed along to some extent yesterday. Settlements ranged from steady to 1.975 cents lower on the day as volume was relatively light. Things seem to want to find some type of balance point around the $2.20 mark at the moment as global prices have fallen behind the US and we have to question if our late season butter exports can keep up given the change in the relationship between domestic and EU prices in particular. Something will likely have to allow the processors to be more comfortable with building inventories soon. We think the spreads between front half and second half futures should increase before that happens given that prices are well above the $2.00 mark now. This may happen with some continued pressure on spot or could happen with buying of futures in the back half of the year.

We look for NFDM to open steady to slightly higher while butter should open steady to slightly lower


Another choppy, sideways day for corn yesterday. Farmer selling remains lackluster at these values, and sellers are waiting for a pop higher on the board. Another big volume corn export inspection of 964k MT, just shy of 40 mil bushels and up 50% from the same week last year. (see chart below). Loadings are now 8.6MMT ahead of last year’s pace.

Fundamental news has been thin for grains this week, except for President’s Trump’s move to withdrawal from the Trans Pacific Trade agreement. Although China was not included in the TPP, and the grains markets don’t seem too concerned so far from the news. US grain, livestock, and dairy associations have been loudly voicing their concerns over these developments though. The market is closely monitoring the Argentine forecasts with the 11-15 day models looking for 2+ inches of rain.


We expect the grains to open mixed within a few pennies of unchanged either direction. 



Chinese Dairy Import for December

December Chinese import data was released overnight and shows imports of WMP increased sharply vs 2015, coming in at 34,000 tonnes, up 76% on Dec15 and up from the 30,620 tonnes imported in November. New Zealand made up the majority of the WMP imports, with just under 88% of the total. Looking at the NZ exports to China, there’s generally a month’s lag between the two, with the exception being Chinese imports in December vs NZ exports in November as product is held over for the low tariff rates at the start of the year. The difference for Nov and Dec 2015 Chinese WMP imports from NZ was 50kt, while the difference for Nov and Dec in 2016 is 22.5kt, less than half of last year. The low tariff level trigger for milk powders in 2016 was 140,358 tonnes (2.5% tariff inside, 10% outside) and this increased to 147,376 tonnes (1.7% inside, 10% outside) for 2017. December imports were higher than expected, especially taking into account quickly the reported January powder imports breached the reduced tariff trigger level. With Chinese New Year taking place earlier this year than last, (Jan 28th vs. Feb 8th), it looks like this contributed to the increased December imports and it would imply that the logistics for December exports from NZ were sped up to hit the free trade agreement window. Chinese WMP imports for the 2016 calendar year totalled 419,750 tonnes, up 21% on the 2015 calendar year.

SMP imports continued behind last year in December, totalling 11,370 which is down 27% on December 2015. Cumulative SMP imports for the 2016 calendar year totalled 184,470 tonnes, down 8% on the 200,270 tonnes imported in 2015. Infant formula imports on the other hand saw strong increase compared with 12 months earlier, totalling 27,330 tonnes, up 9.5% on December 2015 while calendar year 2016 imports increased by 25% on 2015 to 225,330 tonnes. Chinese butterfat imports eased somewhat in December compared with 2015 totalling 6,510 tonnes, down 27.3% on the previous year. Total butterfat imports for 2016 increased however to 81,870 tonnes, up 15% year on year. As with butterfat, cheese imports also eased in December compared with 2015, totalling 7840 tonnes which was up 7% from 7330 tonnes a year earlier. As with butterfat however, cheese imports for the 2016 calendar year increased on 2015 totalling 97,180 tonnes, up 29% from the 75,580 tonnes imported during the 2015 calendar year. Chinese imports of cheese have increased dramatically of the past number of years, with 2016 up 150% from 2012.

Number of NZ Dairy Herd Statistics

Provisional data released by Statistics New Zealand last week for the June livestock survey showed the NZ dairy herd population (Dairy Cows and Heifers, in Milk or Calf) at the end of June 2016 came in at 5,122,497 head, up 1.3% from the 5,056,403 head 12 months earlier. While the Dairy Cows and Heifers, in Milk or Calf population in June was just over 53,000 head behind the population reported in 2014, the 2016 population was the second highest level reported since the data series commenced in 1978.

The number of Rising One Year Old Dairy Heifers and Heifer Calves did drop however to 918,191 head, down almost 62,000 head (6.3%) on the 980,108 head reported a year earlier which may have an impact on the size of the NZ dairy herd further over the coming seasons with potentially less replacement heifers to come on stream in the next 1-2 years. This is also the lowest number of Rising One Year Old Dairy Heifers and Heifer Calves reported since 2011.

NZX Futures

A combined 1,800 lots/tonnes traded on NZX overnight with all lots trading over WMP. Mar17 traded the first 100 lots at $3,375, up $25 from its last traded price from Friday. Apr17 traded the next 400 lots, 100 at $3,415, up $5 and the remaining 300 lots at $3,425. May17 traded the next 600 lots, 500 at $3,425, down $10 from its last traded price from Friday and 100 lots at $3,435. Jun17 traded a further 400 lots, 100 unchanged at $3,435 and 300 lots at $3,425. Sept17 traded the remaining 300 lots on NZX overnight, 50 at $3,485, down $5, 50 at $3,485 and 200 lots at $3,470.

The NZX milk futures Sept18 contract traded 50 lots (300,000 kgMS) overnight settling at NZ$6.43, up NZ$0.03 on its last settlement price.

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