General Market News
· Oil breaks below $49 for the first time in 20017 in sudden selloff
· China February producer inflation fastest in nearly nine years as commodities surge https://goo.gl/c2exQg
· Draghi faces heat from hawks as Eurozone inflation hits target https://goo.gl/1dFkOC
· Revolution in Chinese dining https://goo.gl/Q65PTd
· Lazy, busy or both? Americans phoned in nearly 2 billion takeout orders last year https://goo.gl/TBh2cx
Class III, Cheese, Whey
Buyers have been on the bargain hunt over the past couple of sessions, shrugging off softer spot calls that have threatened to breach the $1.40 mark and leaving the sharp downdraft on GDT earlier this week in the rearview. In a word: resilience. Fears of downward price movement are quelled by a value proposition as price levels – particularly in Q2 – are attracting end-user buyers who want to button-up budgets. Class III market at current remains at a steep premium to the spot equivalent, which currently comes in closer to $15.00 (or even sub-$15.00). That doesn't seem to be swaying the trade into closing the gap by pressuring futures, but rather, it's suggesting that spot will find traction and do the heavy lifting to converge. Did we see the beginning of this yesterday as barrels bounced off $1.41 and surged back to settle at $1.45.
Value play? Bargain hunting? Whatever you want to call it, the answer is “most likely”. The $1.40 is an area of psychological significance which, if breached, could send prices (both spot and futures) to the “woodshed” so to speak and it appears, based on yesterday’s performance that it will be defended. It’s also an area where buy side interest has materialized in the past, as indicated on the chart below, where prices bounced back in Q4 of last year and more recently in late January, which started the trip to north of $1.70.
Is there a repeat performance on the docket? We can’t rule it out, especially with the brazen performance seen in the futures of late. That said, a word of caution as market participants remain quite bearish of prices in many cases disbelieving this week’s bounce. It now appears that the dire forecasts for deficit milk production in New Zealand have passed to the wayside and not going to be down nearly as much as predicted however, the larger story here will probably be EU production moving forward. If the EU steps on the gas in sync with our spring flush, then you can start to paint with a bearish brush again.
For the week ending March 4th, the National Dairy Products Sales Report saw the block price trim back to $1.6367 on stronger sales volume of 13,189,534 million pounds. Barrels also came in lower, at $1.6559 on strong sales volume of 13,273,001 million pounds, while dry whey advanced to 0.5130 on lighter sales volume of 5,162,579 million pounds.
We look for Class III, Cheese and Dry Whey to open steady-higher.
NFDM, Butter, Class IV
Class IV found support from its components yesterday as both butter and NFDM advanced. Most of the action was relegated to the first half timeframe, where double-digit gains hit the board and stemmed a bearish tide that has been washing over the market for weeks now. NFDM option activity was brisk yesterday with over 1,000 options trading hands (compared to 746 in class III and 86 in cheese). Much of that option activity was done in the nearby April and May contracts.
NFDM futures have taken notice of recent spot stability, which tacked on a penny yesterday, to $0.81, and aided recovery efforts as contracts through 2017 have found traction and rallied back to levels of technical interest. Is it bullish? Probably a tad bit early to call that one. But as we’ve said before, buyers have had the lion’s share of the market leverage over the past two months. They’ve been paid to let the sellers race to the bottom on price. Will that continue? The fundamental data suggest that it should. But if buyers become more aggressive, a more significant bounce could be in store.
Butter remains a bid market as the spot price pushed to near the $2.20 mark yesterday, which sparked 1.5-2 cent gains in the futures through 2017. The question facing the trade at this point will be whether spot bidders can muscle price action north of the $2.20 mark for any length of time—a feat that has proven elusive over the past few weeks. For the time being, the market remains in within its 2-month range, not wanting to press back to the higher edge or break down below the $2.10 level.
For the week ending March 4th, the National Dairy Products Sales Report saw butter prices advance to $2.1560 on lighter sales volume of 5,796,665 million pounds, while NFDM slipped to $0.9267 on increased sales volume of 13,791,677 million pounds.
We look for NFDM to open slightly lower, Butter and Class IV mixed.
Action in yesterday’s grain market had more to do with the macro-effect than anything as crude oil prices got slammed on a surge in inventories, taking the nearby contract over 5% into the red intraday and setting the stage for a test of the $50/barrel mark in the coming days. A higher greenback also added pressure to the markets as it remains near the upper edge of the trading range and looking for its 5th straight week of gains on the heels solid economic data that likely seals an interest rate hike next week from the Fed.
Wheat led the complex lower by shedding close to a dime, which dragged on corn and beans in the process. Nearby bean contracts are now hovering right at long term technical support, which could spark some fund liquidation and accelerated selloffs if violated. The recent uptrend in corn is also at risk and clinging to support with both of these markets facing a massive South American crop that is likely to get bigger. The trade will be looking for that justification this morning, when USDA is expected to release its latest supply/demand data and estimates for South American production (see table below for estimates and fund positioning).
We expect grains to open modestly lower this morning.
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