Morning Dairy Comments, 02/16/2017

Thursday, February 16, 2017

General Market News

  • Equity markets are weaker with the Nikkei down 0.47%, in Europe the Stoxx index is down 0.34% and the S&P futures are down 5 points.
  • Brazilian REAL continues to firm up, USD weaker today.

· Gamco joins fight against Lactalis’s Parmalat bid

· Philly Fed index rockets to highest level since 1984

· Fonterra sees smaller decline in 2017 milk production

· ‘Industry 4.0’ Thailand’s path to prosperity



Class III, Cheese, Whey

Class III volume doubled from Tuesday to Wednesday    as nearby prices bounced modestly on more than 1,300 trades. Ultimately, the market still appears more mixed as it chops in a rather narrow range. Cheese futures volume dropped off slightly from Tuesday but still posted over 400 trades yesterday. 

On one hand, the powder price plunge of late seems to be weighing on the dairy complex as a whole. On the other hand, weather in key cheese producing regions over the past month tightened some fresh milk availability. The confluence of these two issues is balanced against higher Oceania prices and stable to lower EU prices, which has left the U.S. cheese market feeling “just about right” for the time being. Retail demand remains strong in certain pockets, but slower in others – so we’ll call demand largely mixed for cheese right now. Buyers seem to find value at a cheese price in the low-$1.60’s. We don’t expect that will change today.

It was reported yesterday that Fonterra’s NZ milk solids collections for January were better than expected, down just 1.4% from last year compared to our forecast of -3.2%. The smaller than expected drop in Fonterra’s collections for January means that total NZ production was likely somewhere between flat against last year to down 0.5%. That is a huge improvement from total NZ production being down 6.1% in October, -5.3% in November, and -3.1% in December.

Fonterra collected a little more milk than expected in January and brought our full season NZ production forecast from -2.6% to -2.5%. There is room for a stronger than expected finish to the season, but recent dry weather is still a risk to finishing the season strong. The impact to prices from the data is minimal, the focus should be on how quickly or slowly production rebounds in Europe.


Part of the reason for the divergence between Fonterra and Non-Fonterra collections is that Fonterra’s milk pool is skewed to the North Island (62% of collections so far this season), and the North Island is more dependent on pasture. In poor weather years, or when weather events primarily affect the North Island, Fonterra’s collections will take a bigger hit than the other processors.

In a letter yesterday, the CDFA denied the Dairy Institute request to hold a hearing on make allowances in CA. This appears to be an effort to uphold status quo ahead of any resolution of Federal Milk Marketing Order process in California. 

Class III, Cheese and Dry Whey look mixed this morning.



NFDM, Butter, Class IV

NFDM futures bounced modestly yesterday in what could be called the beginning of a dead cat bounce. Typically a dead cat bounce is quick and happens in one day. But in this case, we look for a bear bounce to occur over several days. Yesterday was just about the market catching its breath as oversold conditions mount. We still hear chatter of prices in the mid to high 80 cent range for physical today, but the futures market seems to have already moved low enough, far enough out for now.

We said yesterday that, “the EU is not in the business of selling SMP at a loss or pressuring the market lower.” That may have contained a bit more artistic license than was warranted. The EU commission has made it clear that they have a sort of primum non nocere (first do no harm) policy on selling intervention stocks. They do not want to pressure prices lower. But they – like anyone in a commodity market – may at one time or another have to sell at a loss.

A slight boost in spot butter helped propell butter futures as much as 3 cents higher on light volume yesterday. 79 contracts traded as the market remains somewhat on edge ahead of the Easter holiday. The mid-teens seem to be a resonable market equilrium point at present.

NFDM is kicking off today slightly lower, we look for a more mixed trade for Butter and Class IV.


Grain markets put in an impressive performance yesterday as managed money swept into the complex. First, inflation worries continue to be the story for grains/oilseeds and the move has now started to take on a purely technical feel now. But we also had solid crush numbers from NOPA which totaled of 160.6 million bushels of beans, 1.5 million above the average trade estimate and 10+ million bushels higher than last January. That was enough to fuel nearby bean contracts 15 cents to the upside and goose the bean meal market in the process, which looks like it has the recent highs now squarely in the crosshairs.



Bean meal shipments came in above year-ago levels and north of the 5-year average, at 891 short tons, which was enough to jack the nearby March contract off technical support at its 10 and 20-day moving averages to post a very bullish finish yesterday from a technical perspective. On the other hand, bean oil fell out of favor with fund managers as stock numbers eclipsed even the highest trade estimate, coming in at 1629 million pounds which triggered fund selling of an estimated 4,000 contracts.

The strong action in beans lent sympathy support to corn as the “yellow giant” competes for acreage in the 2017 campaign. Fund managers have reversed out of their short position in corn over the past few weeks and are building a long position, roughly 1/3 the size of their bullish bet in beans. The net result is that with planting ahead of us, price weakness may be in short supply until we get the crop in the ground.

Grains are opening steady to slightly lower

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