Morning Dairy Comments, 02/03/2017

Friday, February 3, 2017

General Market News

· U.S. may export more oil in 2017 than four OPEC nations produce

· U.S. job growth beats expectations in January, wages soft

· Uruguay ready to supply more cheese to Russia

· Primary Industries Minister to make NZ drought announcement today



Class III, Cheese, Whey

Blocks rallied 10 cents higher on 1 trade to $1.85 yesterday, while barrels ripped higher by 12 cents on 2 trades to $1.6975… and boom goes the dynamite.

Class III futures traded 16-25 cents in Feb-June, although the back half of 2017 futures were more muted. We have been in a consolidating phase since mid-December. We are expecting a breakout move with a bullish bias from this narrow trading range.

Yesterday’s USDA Dairy Products report revealed total cheese production in December to be 1.05 billion pounds, up 1.3% from last year, as we expected a number north of 3%. Rationally with how wide the Class III/IV spreads have been the past few months we would think any available spot milk would have ended up in a cheese vat vs the dryers. American cheese production was up 3.9% in December while Italian production pulled back 1.1%. Interestingly Wisconsin cheese production was down 0.7% while their milk production was up 1.7% for the month.

Dry whey production was down 13.3% from last year. The 500 lb. gorilla in the room seems to be the Western region that pulled back output by 46.3% from last year. WPC34 and WPC80 production continues lower as more priority has been made to produce Isolates which were up 25% from last year. We do expect coming into Q2 more production will switch back into dry whey as it is currently more economical, and the market is clearly demanding it with recent price moves.

For the week ending January 21, dairy cow slaughter under federal inspection was up 0.96% at 62,900 head, compared with the same period the previous year. Year-to-date slaughter levels are 7.8% lower than 2016 levels, with 180,900 head slaughtered.

The spot cheese price average is now above nearby class III and cheese futures price levels. Many think this is bearish because the futures market reaction to spot action yesterday was rather subdued. We think the interesting aspect is that for the first time in a long time, spot cheese is actually above nearby futures. This is not a bearish dynamic. In fact, it’s more bullish. It is telling us that there is a supply/demand imbalance with fresh cheese and we likely don’t have all the answers yet, but it’s not bearish.

Cattle Comment

The January Cattle report was released on Tuesday this week. It isn’t a closely followed report in the dairy world, but it is the most comprehensive head count the USDA does for cattle on an annual basis and it creates a calibration point that the USDA use for their monthly and quarterly dairy cow estimates for the rest of the year. The most interesting piece of data in the report is the “milk cow replacements, expected to calve” line item. This is the supply of heifers that will be coming into the dairy herd during the calendar year. Heifers expected to calve for 2017 were estimated down 1.3% (-40,000 head) from 2016, however that is down from a record high in 2016. The 2017 estimate is still the second highest on record (data only goes back to 2003).

Feed costs are moderate and margins have been decent and look good (at least based on futures) going forward. It’s possible that with beef prices down the farmers are planning to slow their slaughter rate down and decided they needed fewer replacements on hand. Another possibility is that the drop is due to processing constraints/local issues. The USDA doesn’t give a state level breakout for “expected to calve”, but based on the state level breakout for “All (dairy) heifers 500 pounds and over”, it looks like the heifer supply in Wisconsin/Minnesota/Michigan is down, which might be driven by processing capacity issues. Although WA/OR/ID heifers are also down, and we don’t have a good explanation for that.

Impact: The number of heifers expected to enter the dairy herd is down 1.3% for 2017. By itself it doesn’t mean much. What matters now is the pace of slaughter. The slightly diminished heifer supply is a very mild headwind to dairy cow growth in 2017, but not a concern at this point.


We look for a mixed trade early on Class III, Cheese and Dry Whey



NFDM, Butter, Class IV

The spot NFDM market was uneventful as it was bid up ¼ cent to 95 cents. The NFDM market took some serious haymakers with the deferred futures 1.9 to 2.9 cents lower on heavy volume of 708 trades. The market has a weak tone coming off the meetings this week. The Dutch Dairy Board quotes on Wednesday showed Dutch SMP prices were down €100/mt to €2,020 which is about a 99 cent equivalent price. Better than expected milk volumes out of western Europe seem to be adding pressure to the market. End users are still on the sidelines and are letting the market move to them. The spot CME prices remain at a discount to the EU prices to stay competitive in the export market. There is some concern the US will not be able to sustain the high volumes of exports to Mexico again this year.

The spot butter market was down 6 cents to $2.18 yesterday. Butter production was down a whopping 6.7% during December. California production was down 2% while the western region as a whole was down 8.4%. December’s butter inventories were up 13% over last year which was above the trade’s expectations. The higher than expected stocks are concerning despite the lower production seen in the month. Cream is flowing well throughout the country, and butter churns have been hesitant to build stocks at these higher prices unless backed up by a sale.

We look for a lower trade early for NFDM, Butter and Class IV.

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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