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Morning Dairy Comments, 02/06/2017

Monday, February 6, 2017


General Market News

· South Korea confirms foot-and-mouth disease at dairy farm https://goo.gl/hYn2FE

· Trade briefing for Trump’s team flagged Canadian softwood, dairy https://goo.gl/dvMfJG

· Tyson Foods stock soars 7% following strong earnings report

· Brazil’s 2017 inflation outlook lowered again  https://goo.gl/SWc99w

· Uber hires veteran NASA engineer to develop flying cars https://goo.gl/jcr2Ex

· Chasing a dream built on dairy, this master of milk came home https://goo.gl/JHNglm

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Class III, Cheese, Whey

How does the saying go…in like a lion, out like a lamb? Well last week was the inverse of that for the much of the dairy market complex. Things started off predictably slow with the IDFA conference ongoing in Orlando, Florida, but that changed on a dime to wrap the week with volatility returning in earnest across the entire complex.

For starters, Class III and cheese futures merely oscillated within their ranges during the conference before seeing solid, two-sided action in whipsaw fashion when traders returned, as spot prices surged last Thursday before the rebuffing of blocks on Friday. Impressive movement to say the least. Futures had rallied sharply in response to blocks ramping to $1.85 on Thursday but in reality, they should’ve been a whole lot higher than the 25 or so cent gain at settlement. This left nearby contracts at a steep discount to the spot equivalent, a dynamic not seen in quite some time and foreshadowing of how Class III would finish the week—sharply lower on the heels of pressure brought back to the block market. It begs the question…why the push to $1.85 in the first place?

With futures loath to tag along for the ride, they continued to trade within the recent range and only tested the upper trend line, without breaching it, as evidenced with price action contained within the black wedge on the chart below. That performance threw up a flag of caution to the trade as the sustainability of the move had to be called into question, especially in light of a heavy barrel market that is likely perched above levels where they should currently be priced at. The subsequent pressure brought to bear on Friday kept price action within that wedge as well and also held at the 50-day moving average (blue line), something we’ve seen on numerous occasions over the past couple of weeks.

In either event, the enormously wide spot spread seen over the past week or so was corrected on Friday ahead of tomorrow’s GDT auction and with futures realigned with the spot equivalent, it sets up for a volatile trade in the coming sessions with a breakout from the consolidating, wedge pattern likely to occur in short order as—“the clock is ticking”.

March Class III~Daily

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Outside of flat price, one dynamic we are paying attention to would be the milk-feed ratio and income-over-feed costs, which we acknowledge varies by region and individual farm, but it does provide some analysis that points to herd expansion moving forward in 2017. Things could get interesting here as the margin outlook is favorable for herd expansion with milk production forecast to exceed 2% this year. If domestic usage is unable to “clear” this volume of production, it’ll be imperative to keep pace if prices decline internationally and/or if trade disputes materialize. Check out the tables below:

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

 

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NFDM, Butter, Class IV

Debacle. No other way to state it when referring to how NFDM futures wrapped up the week as sellers have been out in force over the past couple sessions, hitting every bid that pops up in what has been a “whack-a-mole” affair. The current landscape has little to do with spot direction and is being purely fueled by raw emotion—fear. With inflammatory rhetoric between the U.S. and Mexico of late, concern of a trade war has stormed the front and hammered futures to contract lows in the process as traders take a “shoot first—ask questions later” approach.

Granted, USDA did deal out a bearish Dairy Products Report for NFDM on Thursday afternoon, which saw production surge 3.2% higher, to 156 million pounds in December while SMP production was up 18.7%. There continues to be a trend of lower condensed skim production, which was down 26.5%, which could keep a lid on things moving forward. That said, the market is extremely oversold and ripe for a bounce for bargain hunters willing to step in and “catch the falling knife”.

Sellers in the butter market were emboldened on Friday as it became clear the spot price is currently unable to attack the recent highs, which triggered broad-based pressure on futures and a retreat back to technical levels of interest. Nearby futures continue to price out at or close to parity with spot levels, which will continue to open things up to volatile trade moving forward. Cream availability is ample and demand questionable which could easily set things up for a test of the heavily supported $2.00 moving forward. 

We look for a slightly firm trade early on NFDM, mixed for Butter and Class IV.

Grains

At current, it’s a classic function of supply and demand for the grain markets with traders eyeing balance sheets for both corn and beans in the midst of strong demand countered with the South American crop about to come online. Weather concerns have abated of late and a certain amount of risk premium extracted from the forward curve in futures as a result. On the bean front, Brazil’s harvest is well ahead of last year’s pace and looks to be sufficient to get our domestic crop to harvest come next fall without shortage. This dynamic can change on a dime and likely will, as there’s plenty of time on the clock before the 2017 crop is pulled from the ground, let alone being planted. The trade will be keeping a close eye on the price ratio between corn and beans to get a better feel for how much acreage will switch between the two. At this juncture, that ratio is right at the tipping point which will set up an interesting trade in the coming sessions with many in the camp that corn will lose a significant amount of acreage to beans in the 2017 campaign.

On the corn front, price action continues to be contained by long term technical levels of resistance, particularly at the 200-day moving average (black line on the chart below). Fund managers have adopted a “risk-on” stance towards the grain sector of late and that may be enough to muscle price action up through this long term level of resistance. That said, farmers are still sitting on massive stocks from the last three years and a push through this area to levels north of the $4.00 mark will likely shake quite a bit of physical lose. Exports continue to remain strong however and ethanol production is at or near record levels so while we may not be looking at a sustained bullish market, the floor has certainly been raised, which should leave the harvest lows intact.

March Corn~Daily

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We expect grains to open higher.  


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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