Morning Dairy Comments, 02/17/2017

Friday, February 17, 2017

General Market News

· EU Milk Collections for 2016 up 0.47%

· 'Biggest storm of winter' to unleash flooding rain in California today

· Kraft-Heinz confirms merger proposal with Unilever was declined

· China closes live poultry markets amid deadly flu outbreak

· Why ditching NAFTA could hurt America’s farmers more than Mexico’s

· Markets closed Monday in observance of President’s Day



Class III, Cheese, Whey

Pressure on the Class III market lightly peppered the board early in yesterday’s session but as time wore on, futures continued to leak lower as the meltdown in the NFDM dragged prices double digits in the red by the closing bell. The market has been in consolidation mode for quite some time, tracking mostly sideways on light volume and compressed ranges as the trade searches for a story to move on. It may get that story come next week, with GDT and milk production on Tuesday and cold storage numbers on Thursday. As far as today’s session is concerned, price action will be dictated by spot and position squaring ahead of the long weekend.

Speaking of spot, the spread remains inverted with a nickel-plus premium to the barrel and a Class III equivalent coming in around $16.40, which leaves nearby futures still holding a premium. That said, prices seem somewhat balanced given the current landscape, with a “buy-the-dip” mentality still present from an end user standpoint and hedgers proactive on price breaks. Also weighing in on the market would be the ramifications stemming from the recent adverse weather conditions out west, which will likely have had a negative impact on milk production. We’ll get a verdict on that next week in the milk production tallies, but until then, the old adage warning against selling a “quiet market” is probably sound wisdom.     

Light selling around 49-50 cents seems to have picked up some interest thru December 2017 for Dry Whey. While we don’t expect a drastic decline in whey prices right now, the NFDM market has created a supply of bullish defectors as the NFDM market plummets. Look for a two-sided, mixed trade again for dry whey today. 
The Central Mostly Dry Whey powder price was up 1.25 cents from the previous week at 47.38 cents, while the Western Mostly price was steady at 49.50 cents. 

For the week ending February 4th, U.S. Dairy Cow Slaughter under Federal Inspection was 2.8% higher from year-ago levels, at 66,400 head slaughtered. Year-to-date totals are running 4% lower, at 313,100 head slaughtered.                                                            



NFDM, Butter, Class IV

If there’s a word to sum up the NFDM trade it would be: carnage. Every time the market tries to take a breather and come up for air, it has been construed as a selling opportunity and pounded back to a fresh low. Yesterday’s action was no exception with many contracts pressured down the daily limit, tattering the forward curve in the process. Futures trading volume eclipsed 600 contracts yesterday while open interest fell by 1 contract. This tells us that the lion’s share of the pressure is coming from traders looking to get out of long positions, which to some degree or another has been the case for the better part of a week now (certain contract months). Buyers seem to be both commercial hedgers looking to take advantage of a really nice pricing opportunity thru Q1 2018 and some light short-covering. The market is technically oversold, but so long as panic/fear is in the driver’s seat it can remain oversold for quite some time and overshoot rational levels in the process. 

Below are a couple of charts to put the recent move into perspective. What a difference a few weeks make as Q2 NFDM futures were pricing near $1.16 back in mid-December before crashing down to current levels. The second chart shows the spread between international prices, which conjures more questions than answers. A price premium for Oceania sourced product is probably warranted given the drop in production in NZ/AU, but why did it pop higher this week? Chinese demand back in the market? Fresh concerns about how the NZ season will wrap up? All valid questions which will make for quite an interesting GDT auction come Tuesday.

April-June NFDM – Daily Chart:



In contrast to action on the NFDM front, butter is looking to confirm a short-term bottom by logging three straight sessions of gains. The spot price has held and bounced off $2.10 support, which has boosted futures back to levels of technical interest. Overall, we continue to hear of ample cream supplies with the exception being out west, where the aforementioned weather factors likely crimped butter production. That aspect, combined with hedgers seeking coverage has lent support to the market and limited the extent of downdrafts to levels north of the $2.00 mark.  


The grain trade saw a sharp reversal from yesterday's action, with beans leading the way to the downside by taking a 17-cent hit, which dragged corn a nickel lower and wheat down 7 cents in the process. Funds were sellers across the board, basically erasing yesterday's aggressive buying spree. So, what gives? We'll just chalk this one up to exhaustion after posting a series of gains and generally friendly weather patterns in South America. Closer to home, beans will continue to fight for acreage with the current corn-to-bean ration coming in at 2.6:1. That’s likely skewed enough to shift some acreage to beans at the expense of corn, but probably needs to push further to ensure enough beans are planted to pad the balance sheet.

Estimated Managed Money Fund Positions



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