Morning Dairy Comments, 02/02/2017

Thursday, February 2, 2017


General Market News

· The FOMC left rates unchanged but said there was ‘improved’ optimism among the business community and consumers https://goo.gl/wCXEku

· Reckitt Benckiser in $16.7 bln takeover bid for Mead Johnson Nutrition https://goo.gl/j2vXv1

· U.S. Senate confirms Tillerson as Secretary of State https://goo.gl/Ho0qGu

  • The UK Parliament voted 498 to 114 in favor of moving along the EU Bill which will give PM May the authority to trigger article 50 if passed
  • Deutsche Bank had a rough 2016 losing $1.51 billion after restructuring and negative news stemming from its fine from the US

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Class III, Cheese, Whey

The annual International Dairy Foods Association (IDFA) meeting wrapped up yesterday in sunny Orlando. The dairy market theme this year seemed to be aptly characterized as “mixed”. For what it’s worth, there seemed to be a bearish tone to powder and cheese and a more bullish tone to butter prices. Ironically, the barrel market has gained over 10 cents in just two days this week so perhaps it’s time to dust off the old notion that if everyone is looking one way – you should look the other.

Another fixture in conversations was around ample US milk production. January weather events notwithstanding (eg. Idaho, etc.), milk flows in the country seem to be the anchor for processors right now. The real uncertainty is found in demand – both domestic and export – going forward under the new ruling power in Washington. IDFA seemed to raise more questions than answers this year…

The block/barrel spread was also debated with at the meeting. Why are barrels so discounted to blocks and what do we do about it? There is no one specific reason for the spread from our perspective. We have a bit more barrel production going on at a time when heavy processed cheese foodservice demand is underperforming relative to natural American cheese. Perhaps we’re seeing an effort to correct that spread this week in the markets. Perhaps we’ll get back to a more “typical” spread for a while as market forces go to work adjusting the supply/demand balance. On the other hand, if this is an inescapable issue, maybe we ought to change the  weight given to barrels in pricing somehow. Just spit-balling here.

Turning to the markets, for a week that is normally associated with subdued volumes, class III and cheese futures have traded moderately heavy volumes this week. 1,135 class III and 591 cheese futures traded yesterday (and over 1800 and 700 contracts, respectively, on Monday). If we had to label something as subdued, we’d “volatility” has been the most restrained. Relatively narrow trading ranges and stable price moves as the spot market has worked higher closing the spread to futures.

Later today we get the dairy products production report which we expect to show an increase in cheese and nonfat production and a decrease in butter. Please see estimates on next page.

Argentina’s milk equivalent exports in December were down 15.9% from last year. Given the reported drop in milk production, the weak exports make sense. With milk production still reportedly down 19% during December, it’s hard to see much of an improvement in near-term exports. While the volumes are small, notice that the Argentines have made the economically rational adjustments to their export mix with SMP, butter, and cheese up while WMP was down.

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We look for Class III, Cheese and Dry Whey to open mixed. 

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NOTE: Open Interest data issue on CME website this morning

Class IV, Butter, NFDM

Class IV saw the second half move anywhere from 2 to 20 cents higher as non-fat futures finished modestly higher. February butter finished nearly 3 cents lower. The weakness in February would suggest the trade is expecting additional sell side pressure in spot.  Meanwhile, end-users of all stripes welcome additional price weakness particularly in the second half where coverage is actively sought. March thru June was slightly lower with reasonably good strength in the second half as end-users continue to feel the need for coverage in those later months.

NFDM is opening lower in line with the overnight trade, Butter and Class IV look mixed.

Grains

Funds stepped in late and bought an estimated 17 to 18 thousand contracts of corn, which has been stuck in a consolidation type trade since October. Yesterday’s settlement above 3.67 resistance should put shorts on notice and if the funds, who are relatively flat, feel the market is technically undervalued they could break this market into a new price range.  Our grain brokers pointed out yesterday that managed money carried around 100,000 short contracts over the last four months with little to no return.  If a weather/acreage/demand expansion story develops, they could easily push their net position to a long 100,000 contracts. 

Soybeans finished double digits higher led by corn. South American weather looks to be improving in the extended forecast even as early harvest delays are expected in Brazil because of heavy rains in the 5-day forecast.

Wheat accelerated higher after breaking through the 100 day moving average finishing at recent January highs.  Weather in the major producing nations is expected to be non-threatening to winter wheat and Russia’s ag minister is boasting that the condition of their winter wheat is ‘in such good condition they expect to generate another large crop built on above trend yields.

Corn export sales were good at 451k mt vs trade guess at 250-450k mt, sales were down from last week’s big number of 850k mt but we were at a pace to exceed the USDA current estimate. Exports sales came in at 623k mt vs 500-800k mt, main feature was 579k mt to China which included 303k mt switched from unknown 219k mt which included 206k mt switched from unknown.

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Grains are opening mixed this morning.

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