Morning Dairy Comments, 02/27/2017

Monday, February 27, 2017

General Market News

· Mexico warns U.S. it’ll cut of NAFTA talks if tariffs proposed

· Oil gains as bullish bets on rising prices hit record high

· Dairy added $7.8 billion to NZ GDP, report says

· Cooperative mergers shrink Wisconsin Dairy Farmers’ Options

· World stocks dip on M&A’s falling through



Class III, Cheese, Whey

The bear claws came out last week as downside momentum that started two weeks ago gained more steam last week. The majority of the futures weakness to end last week was due to panic selling in the whey futures market with most contracts settling 3-4 cents lower. Generally, the soft Class IV market has also been a factor in pulling the Class III market lower lately. But Class III futures remain over a $1/cwt premium to Class IV futures in the nearby months. With the spring flush quickly approaching surplus milk will try to find a home whenever possible in a cheese vat vs a dryer.
The bears dominated Friday’s Class III trading session as the 2nd quarter pack fell 30 cents lower to $16.51. With regular doses of negative news out last week (GDT, Milk Production, Cold Storage), the market has as heavy a bearish bias as we have seen in some time and sentiment is squarely with the bears. The questions are not, “will we bounce?” But rather, “how low will prices go here?”
All of that seems rather bleak if you’re a dairy producer who has not hedged, but we’d be remiss not to point out the oversold nature of the futures market at present. This doesn’t mean we won’t go a bit lower (we’re starting out a bit lower here this morning), but technically the little green circle below (roughly) can be a target for bottom-feeding buy side interest to occur based on a number of technical indicators. Two of those indicators displayed below and worth noting this morning:  Fibonacci retracement levels and the key target of 200-day moving average.
Perhaps we will need to see more lift in spot cheese for this to occur. Perhaps some other set of circumstances will arise. We bring this to your attention not because we have the news yet, but because it offers some level of insight into technical support that is not present in fundamental discussions today. But are equally as important.

2nd Quarter Class III Futures:


Back to the bearish: the weak NFDM market which is trading just around EU intervention levels has been adding pressure to whey. The big whey rally has caught end users by surprise which were forced to cover shorts, although the near term urgency to cover whey has subsided. Mostly feed buyers are substituting dry whey and WPC34 for NFDM when possible in their formulas. This is the main underlying reason whey has softened so abruptly combined with increased dry whey production out of WPC’s. In the last go around the EU feed markets were one of the largest buyers out of the EU’s intervention program. Logically they would not be urgently bidding up dry whey when they can source more economical SMP/NFDM floating around.

We look for Class III, Cheese and Dry Whey to open mostly lower.



NFDM, Butter, Class IV

The spot NFDM weakness persisted Friday finishing 3 cents lower to 82.25 cents on 8 trades. The CME NFDM is now close to parity with EU intervention levels, which are at €1,698/mt or just shy of 82 cents/pound. (with a Euro/USD FX rate of $1.06) The market may need to trade lower than these levels to make it economical for substantial volumes to clear into intervention due to packaging/logistics and cash flow reasons. The hits are coming from all directions on NFDM, and I can write a short novel on how worried everyone is on Mexico’s situation. NZ’s milk production was up 0.8% in January compared to a forecast of -0.6%. The full season milk production forecast in NZ has shifted from -2.5% to -2.0% which is not huge, but notable that the shoulder production season should be better than expected.

China’s official import stats were released later last week and generally disappointed the market. WMP imports were pegged at 108,126mt, down 10%, from last yr, and SMP came in at 32,813mt, down 2% (141,000mt for SMP and WMP combined). Although the main concern is China did not fill the reduced tariff rate quota of 147,000mt of SMP and WMP combined. Some bulls may argue that tighter milk production in NZ caused the lower export numbers. Although bears are thinking that some savvy Chinese buyers did not see the value on the reduced tariff rate of 1.7% vs the normal 10% tariff as a good risk to reward ratio. Alternatively, they opted to let the market fall to take advantage of substantially lower spot prices later in the year, which has played out in February.

We think that if China were really short of product they would have kept bidding the thing to the stratosphere. They must be comfortable enough with their own supply, and the global outlook, that they backed off and decided that pulling the product in February/March wasn’t any different than pulling in January, especially if the price pulled back a bit. Now if Chinese imports are weaker than expected in Feb/Mar, then the story changes to a weak Chinese demand story. But for now we think it is a limited supply in NZ and adequate domestic balance in China story.


The butter futures market continued to firm on Friday as spot was unchanged. The spot butter market is in a manageable target range for many end users with $2.10 budgets.  Seasonally cream is floating around the country, and is ending up in the churns. Easter demand is around the corner and in a few months ice cream with start absorbing more of the cream supply. Something to keep in mind: with the FDA banning partially hydrogenated oils on June 18th  2018, food companies are starting to switch to other ingredients such as palm oils. Most of the changes will be made by June of this year, giving a full 1 year buffer on having inventories compliant with the FDA.  Although in some cases restaurant chains are starting to ramp up their use of butter after McDonald’s switched last year.
NFDM, Butter and Class IV look mixed to start today.


Quiet day on Friday with corn futures settling slightly lower with the Ag Forum providing some excitement. The USDA assumed Ethanol usage to increase 50 mil bu., Feed use to fall 150 mil bu., and exports to fall 325 mil bu. The USDA is estimating 2017/18’s corn carry out to come in at 2.2 bln bushels, 100 mil bushels lower than last year. The carryout will not come significantly lower despite production to come down an expected 1 billion bushels due mostly to decreased acreage.  Corn export sales for the 2016/17 marketing year are running 7.9 mmt above USDA estimates of an increase of 8.3mmt. On a 3 yr seasonal basis corn sales are ahead of making the USDA’s estimates by 2.22mmt. Looking at shipped vs sold ratios we are at 54% this yr vs 53% last yr. This fact implys the market is not “front loading” the exports given we have ample time left in the marketing year.

We expect grains to open modestly higher.



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