Morning Dairy Comments, 03/08/2017

Wednesday, March 8, 2017

General Market News

· Mexico cancels sugar exports permits to U.S. in trade dispute

· China reports first trade deficit in 3 years as imports surge

· ‘Essential that co-ops put GDT results in perspective, including when setting milk price.’ Says IFA Dairy Chairman

· National Milk proposes changes to Dairy Margin Protection Program



Class III, Cheese, Whey

Some days you look at market prices after lunch and say, "well that doesn't seem right". Yesterday was one of those days in the dairy complex. Class III opened the day 20-30 cents lower Tuesday with pressure stemming from a swift drop in dry whey prices and a blood bath of a GDT auction (at least for powders). To add to the bearish pressures, spot block cheese dropped 2 cents to $1.46 while barrels traded down ¾ cent to $1.43 on 17 trades. Despite this weakness, Class III and Cheese futures reversed course and closed modestly higher on heavy volume. 2,787 Class III and 1,411 Cheese futures contracts traded and open interest rose nicely (388 Class III and 710 Cheese) as new buyers rushed in. It may be a value play or run-of-the-mill budget setting as many buyers have played a short inventory game amid falling prices this year. Whatever the case may be, we won’t call yesterday’s bounce a short-covering rally. That has yet to happen.

No doubt, bullish news is scarce right now. But yesterday’s activity suggests to us that the bearish news is likely baked in. The market has digested the weaker GDT, which was widely expected to be lower. The markets have already priced in the softer seasonal demand of February. In fact, it's quite possible that the futures markets have already priced in the seasonal "flush" at this point. All of this remains to be seen, but given the resilience of the futures today - which had every reason to go down and very few to go up - we'd say that the Class III and Cheese markets are carving out some sort of bottom right now.
Dry whey futures also rebounded yesterday on good volume of 225 contracts. Futures still finished mostly lower, but well off their lows as the market wrestles with better than expected export demand earlier this year. We look for some consolidation on dry whey futures around current levels. If Class III/Cheese catches a bid in the coming days/weeks, dry whey could see more support from the arbitrage trade.

While milk production in New Zealand is recovering, Australia is still looking pretty rough. Total AU production for January was lower than expected, down 5.9% from last year compared to the forecast of -4.0%. Most states were close to forecast, but the largest milk producing state, Victoria, was down 7.2% from last year compared to a forecast of -4.0%. Given the persistent large decline in the state, the herd must be down significantly. Our guess is they’ve probably lost 40,000+ (-3.6%) head from last season, which would be similar to the drop that we saw in the ‘09/10 season. We’re still looking forward to some growth as margins have improved, but if they’ve killed more cows than expected, production could remain weak for the remainder of the season.


We look for Class III, Cheese and Dry Whey to open steady-higher.



NFDM, Butter, Class IV

NFDM and Class IV markets took the collapse of powder prices in stride yesterday bouncing modestly on light volume? Is this the calm before another leg lower, or should we take the move at face value: prices that do not fall on bearish news have already accounted for such news. We think the latter. But more importantly, if a spike in buyer interest develops - and we think the market is ripe for that - the NFDM market could move quite suddenly from being the dog that won’t bark to the dog that bit your face off.

The drop in WMP was a little more surprising. With Europe still around $1.40, the GDT auction dropped to $1.25. That is bearish and will be a drag on the complex. Our calculated return on processing the different products would suggest that NZ should shift milk out of WMP and into cheese or butter/SMP at current prices, so expect some shifting in volumes offered to try to narrow those gaps.

Butter futures bounced yesterday as the spot market seems tethered to a $2.20 right now. Futures bounced as much as 3.47 cents as the fat story globally remains well-supported. AMF prices during GDT fell 0.7% to $2.56/lb. while GDT butter averaged $2.11/lb. up 1.2%.

Cream shipments to Canada did collapse in January and they could be near zero for February. Shipments of butter to Canada also slowed in January. Total US butter exports were up 101% from last year, which seems meaningful, but it is lapping over an exceedingly weak January 2016. Butter exports for January 2017 are nothing to be excited about.


We look for NFDM, Butter and Class IV to open steady-slightly higher.


Corn futures pushed into the red early yesterday as contracts sold off in sympathy to the weakness of the soy complex.  Producer selling has evaporated as farmers focus on field prep ahead of the impending growing season.  Brazil continues to experience beneficial weather leading to expectations of a larger than previously forecast crop.  Funds were estimated to have sold 7,000 contracts yesterday.

Soybean values dropped lower on increasing production estimates for the Brazilian crop from FCStone and Celeres, both projecting the soybean crop to come in at least 5 mmt higher than the USDA’s February estimate.  Brazilian soybean farmers are slow to sell their crops due to currency strength which has lowered the value of their crop by 2 reals/bushel less than during the same period last year.  Funds were credited with selling 8,000 soybean contracts, 4,000 meal and 4,000 oil.

Chinese customs data showed February soybean imports at 5.54 MMT, up 23% from last February but down 28% from January’s 7.66 MMT total; cumulative Jan-Feb imports of 13.19 MMT are up 30% from last year’s pace.

Wheat futures were sold as world growing conditions are considered to be good.  The FSU is set up for a good crop while the Russian state weather forecaster says their winter grain crop is in better than normal condition.  Both China and India are thought to see bumper crops in both regions.  The only area of concern is the southern plains of the U.S. which is dealing with dryness and wild fires due to a lack of appreciable rains.     

We expect grains to open modestly lower this morning.


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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