Morning Dairy Comments, 02/24/2017

Friday, February 24, 2017

General Market News

· US stock market world’s third best since 1900

· Stock futures drop with crude oil price declines

· Farmers in Northern Ireland should prepare for a ‘world without direct subsidies’

· China says no intention of using currency devaluation to its advantage



Class III, Cheese, Whey

Class III and Cheese futures finished mixed yesterday after trading lower early in the morning on follow-through selling. Block cheese, getting a reprieve from recent sell side pressure, bounced 4.75 cents and ushered in a modest bounce to futures. Trading volumes again were very respectable with over 1,900 Class III and over 700 Cheese contracts changing hands with open interest again rising substantially (515 class III, 475 cheese). In fact, open interest figures are quite interesting on this shortened holiday week. In just the past three days, Class III open interest is up 1,725 contracts or 5.3%. Cheese futures open interest is up 1,797 contracts or 7.2%. And Dry Whey futures open interest is up 356 contracts or 6%. While commercial buyers are in the market adding modest positions on the recent downturn, this week has really been marked by new sellers. Across the board.

It was also reported yesterday that milk production in New Zealand was better than expected in January, up 0.8% compared to the forecast of -0.6%. With total NZ milk up 0.8% and Fonterra down 1.4%, that means collections by everyone except Fonterra were up 12.6% from last year. The better than expected production in January has pulled the full season forecast up from -2.5% to -2.0%. It’s bearish, but not a market moving revelation. In very rough terms a half-percent change in NZ production impacts global prices by about 2.5%. So revising the NZ production forecast from -2.5% to -2.0% would reduce the price forecast by 2.5% if everything else is held constant. But then the lower price increases the quantity demanded and it decreases production out of the other major exporters so the net impact to global prices is probably more in the range of -1% to -1.5%. So again, not a big impact. But combine better than expected production in NZ with 2.5% growth in the US and recovering production in Europe and you get a pretty bearish story on the supply side.

Between a lackluster GDT event, bearish U.S. milk production numbers, better-than-expected NZ milk production, net spot cheese weakness, and healthy premium in the forward curve, trader sentiment has had plenty of reason to change this week. But does that mean prices ought to continue to move lower still? Will March promotions cease to have any impact? Where will better cheese demand kick in or are we relegated to a typical seasonal milk flush/ lack of demand price weakness moving forward? These are all tough questions to answer. But it is important to realize that the spot market at in the mid-$1.50’s is a rather agreeable price based on anecdotal conversations we’ve had, so we would expect continued buy side interest around current levels. Beyond that, the forward curve could see some additional weakness here, but there is a long time until summer so we expect prices to hold in around the $17.00 level for now ($1.70 or higher cheese).
For the week ending February 11, dairy cow slaughter under federal inspection was up 2.8% at 63,500 head, compared with the same period the previous year. Year-to-date slaughter levels are 2.9% lower than 2016 levels, with 376,600 head slaughtered.
American cheese stocks of 760.7 million pounds were 6.2% higher than a year ago and 4.7% above the previous month. The American cheese supply at the end of January was equivalent to 59 days’ worth of use, compared with 56 days last month and 56 days last year. January stocks were 13.4 million pounds more than expected. December stocks were decreased 2.5 million pounds.
Total cheese stocks in January of 1,232.6 million pounds were 4.6% higher versus a year ago and up 2.9% from last month. Stocks were 0.1 million pounds more than expected, while the previous month’s stocks were revised 8.3 million pounds lower. The total cheese supply at the end of January was equivalent to 36 days’ worth of use versus 35 days last month and 36 days a year ago.

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



NFDM, Butter, Class IV

A total of 684 NFDM contracts changed hands yesterday, the second highest volume total of the year, as bearish sentiment continues to keep a lid on prices. Chatter of buy side interest is strewn throughout the 80 cent range – from low to higher 80s. Open interest in this market also rose this week – up 4.2% over the past three days or 312 contracts. But what’s more interesting on NFDM is the meteoric rise in options open interest so far this year. NFDM options open interest is up 186% from a low of 3,493 contracts on January 5 to 10,001 contracts on February 16 (we’ll update this info today, but the point is made). It’s hard to know all the reasons for such a tremendous increase, but from our perspective we can say that commercial hedgers on both sides of the market have increased their use of options this year. And since commercial buy side coverage was light closing out 2016, such a sharp increase in open interest is not totally unfounded – particularly as price weakness has given end-users another crack at really nice price levels to lock up as far out as 2018. We expect more of a mixed trade early this morning.


There is a somewhat predictable pattern for the CME spot butter market in late February/early March due to the “new crop” rule. On February 28th, butter as old as 15 months can be sold on the CME spot market. On March 1st, only butter produced since December 1st of the previous year can be traded, so only inventory built up in the previous 3 months is eligible to trade. Predictably, this tends to cause a jump in the spot price. There is often a dip in the price at the end of February too. The magnitude of the jump depends on how much butter has been put into inventory in the prior 3 months. I still don’t have the US forecast models built out yet, so I don’t have an exact forecast for stocks at the end of February. However, stocks ended January up 16% from last year. If stocks at the end of February are also up 16% from last year, then we are likely looking at a 7-8 cent jump in spot prices between the last few days of February and the first few days of March.

The new crop hop tends to be a short-lived. After the first week or two the over-riding fundamentals take over again, which might mean prices going higher still or lower. This year I would bet lower after the hop.




Butter stocks of 223.1 million pounds were 16.1% higher than they were in 2016 and 10.5 million pounds more than expected. Butter stocks were above the previous year for the twenty-fourth month out of the past 25 months. Last month’s stocks were revised 8.9 million pounds lower. The butter supply at the end of January was equivalent to 42 days’ worth of use, compared with 32 days last month and 38 days last year. January stocks were 34.3% above previous-month levels.

The butter market should open steady, NFDM lower with the Class IV steady to lower.  


Corn values slumped yesterday after the USDA released their outlook report (forecast table below), confirming market expectations for 90 million corn acres to be planted this spring. The USDA projects the average price for corn next year to increase by 10 cents to $3.50/bushel and that producers with continue to struggle with profitability.  Ethanol production continues its weekly decline while stocks continue to grow on tight margins.  Funds were estimated to have sold 12,000 contracts throughout the day. 

Soybean futures suffered double digit losses as the USDA confirmed the market’s fears of 88 million acres to be planted this year.  This acreage figure would be the minimum required to maintain the current level of carryout if yields remain steady within the recent trend.  In Brazil the Agroconsult firm raised their estimate for soybean production by 1.5 mmt to 107.8 mmt compared to the USDA’s recent projection of 104 mmt.  Funds were credited with selling 11,000 soybean contracts, 5,000 meal and 6,000 soybean oil.

Wheat acres were projected slightly below the average market expectation at 46 million acres, marking a 400,000-acre decrease from last year.  The carryout figures remain a burden on the market and will continue to weigh on values.  Funds were estimated to have sold 3,000 contracts on the day.  



We expect corn and wheat to open lower, soybean marginally higher. 


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