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Morning Dairy Comments, 01/27/2017

Friday, January 27, 2017


General Market News

· Trump wants to pay for border wall with import tax: spokesman http://on.mktw.net/2jCsoqL

· Glanbia working with DFA and other partners on new US cheese and whey facility
https://goo.gl/FBkXIy

· U.S. dairy exports to Mexico now account for a quarter of total dairy exports and accounted for 3.4% of all U.S. milk production in 2015 http://bit.ly/2jEAqiV

· Whey Protein Market worth $12.4 bn by 2021 http://bit.ly/2kAt5kf

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Class III & Cheese

Class III and cheese volume spiked yesterday as technical levels of support held and commercial buyers became marginally more aggressive for additional coverage. There was also a mixed of speculative short covering and new longs put on against a market that continues to hold nice premiums to spot and healthy margins for dairy producers.

The lions’ share of the 2,272 class III futures trades took place in the February to June timeframe, but cheese action was a little more evenly spread out. Most notably nearly 300 of the 1,126 cheese futures that traded did so out in the first half of 2018 around the $1.70 price average.
Although spot cheese has been mostly lower this week, the futures market seems done acquiescing to barrel weakness. With relative stability in the block market yesterday, the market seems to favor the possibility of a barrel bounce in the near term. While it’s too early to know how much upside barrels have now if any, the other element on traders’ minds is the 2017 IDFA conference that kicks off  this weekend in Orlando, Florida. The conference has been a pivotal meeting for dairy markets in the past and this year may be no different. Many traders and businesses know this and want to position themselves – whether that means in or out of the market – ahead of such a meeting. We will give updates from the conference over the next few days.

The overall trend of class III and cheese has really been sideways and range bound this month. Futures prices have come off here recently, but it’s important not to lose perspective of the bigger picture. Below is a quick picture of the February to June Class III. This is not up or down, but sideways. Although we don’t know which way the market will breakout if and when it does, the old rule of thumb is that a market will tend to move out of a range in the direction from which it came. In this case, the old rule of thumb says more upside is a distinct possibility.

Feb-June Daily Chart

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The latest DCANZ data shows NZ milk collections continuing the trend and remaining down year on year, but by the smallest deficit in Q4. December collections for NZ came in at 2.69 million tonnes of milk, down 2.75% on December 2015 and down 2.71% on the three year average.

Argentina’s Ministry of Agriculture have now also released their December figures, which continue to be well behind last year. Total milk collections came in at 743kt, down 18.94% on the 916.6kt collected a year earlier and down 20.23% on the three year average.

For the week ending January 14, dairy cow slaughter under federal inspection was down 7.02% at 60,900 head, compared with the same period the previous year. Year-to-date slaughter levels are 11.9% lower than 2016 levels, with 118,000 head slaughtered.

We expect class III, cheese & dry whey to open mixed.  

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Class IV, NFDM & Butter

The spot NFDM dropped 5 cents to 93.50 cents yesterday on four trades. The market has moved abruptly lower in the past week, and the culprit seems to be better than expected milk production from Western Europe. Tensions between the US and Mexico is not helping matters either especially with how weak the Peso is in the first place.
During the fourth quarter the EU-28 had their “Milk Production Reduction Aid Scheme” where they paid dairy producers roughly $7.50/cwt to cut production. The program is in effect for the 1st quarter of 2017, but most of the budget is drawn down. Producers in Europe may turn on the milk faster than you think. The 2nd chart shows March 2017 EEX SMP futures which crashed from €2,300/mt to about €2,010/mt (97 ½ cents/lb) this morning on further weakness.
Market participants in Europe are anticipating the EU to possibly lower their offers on the next intervention tender on Tuesday Feb 7th. The prior tenders the EU has not been aggressive offering, and did not accept a bid for €1,900/mt on about 400+ MT (on product older than Nov 2015). Now with EU SMP futures hovering at €2,000/t reflecting the market for fresh product the EU may be forced to be more serious.

The spot butter market fell1.25 cents lower yesterday to $2.185 on one trade. The market has fallen from highs of $2.30 earlier this month. Seasonally the cream supply is strong and that has pressured the price lower a bit. Producers and end users are hesitant to abandon their metaphorical trenches fearing the consequences of moving into no man’s land. There is good underlying support below the market as end users have mostly raised their targets in the $2.10-2.15 range, as $2.00 seems out range for now given the counter seasonal strength in the market.

March 2017 EEX SMP Daily Chart

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We look for NFDM to open lower, Butter and Class IV mixed/ lower.

Grains

Corn was slightly lower yesterday, although exports sales showed some support to the market with a 1.37MMT sales, which was 70% higher than the same week a year ago. The market is still oversupplied which is stifling any significant rallies as producer selling picks up on spikes higher.

Below is the historical corn carryout to use chart. The world has had a carryout of use of 20% for the past 3 seasons. US carryout to use is slightly below those levels with 2016’s record corn crop, and it has jumped significantly from 15% seen the past 2 years. With China largely out of the DDG’s markets, that should keep commodities in dairy rations under pressure as those DDGS search for a new home in the export market.

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Soybeans were weaker as the production worries in Argentina start to fade. Soybean export sales did not impress the market printing 539.4k MT for the week vs 979.6 a week ago and 647.8 a year ago. China markets are now shut down for the holidays and it will be up to two weeks before all participants return.
Grains are opening mixed this morning. Feb options go off the board today.

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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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