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Morning Dairy Comments, 03/23/2017

Thursday, March 23, 2017


General Market News

· Saudi Arabia advises citizens to dump Brazilian meat https://goo.gl/rZEI4d

· White House moves to tweak health care bill to win over conservatives https://goo.gl/HmpWz3

· Crude oil rises from 4 month lows, inventories curb recovery https://goo.gl/TdETCX

· Danone reaffirms plans to acquire Whitewave https://goo.gl/3d8i2A

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Class III, Cheese, and Whey

Indecision may or may not be the problem for Class III and Cheese futures markets. Discussions continue to center around plenty of supply and US milk flush, but so far this week has marked the strongest price action in nearly two months. The USDA told us yesterday that American cheese stocks in February hit 774.1 million pounds - 8.1% higher than a year ago and 2.9% above the previous month. The American cheese supply at the end of February was equivalent to 60 days’ worth of use, compared with 58 days last month and 56 days last year. Yet block cheese is up 9 cents from last Thursday. May Class III futures are up 82 cents from last Thursday.

The market has seemingly accounted for yesterday’s storage report and is now trading the uncertainties of newfound demand. There is a demand response to price and we’re seeing a moderate change in temperament around cheese demand. We may not be going gangbusters, but it looks like the quiet of February and early March are over. Buyers seem ready to focus a little more on stocking up as opposed to sitting on the sidelines. And if spot cheese defies gravity and continues to move higher this week, that sentiment may only become emboldened.
Volumes were again moderate yesterday with over 1,700 class III and over 800 cheese contracts changing hands. Interestingly over 1,100 class III Call options traded – but more than half of those came in just two strike prices in June. The June $17.00 class III calls traded nearly 300 times. And – are you sitting down? – the June $20.25 calls traded nearly 400 times for a few pennies. We wouldn’t read too much into that. In fact, the words “lottery ticket” we’re uttered around the office when discussing that trade, but it is interesting to note. Over 1,900 class III puts traded hands with big size coming in around the June $15.00, July and August $15.75 strikes.

Australian milk production in February decreased by a larger percentage than expected year over year, down 6.8% compared to the forecasted decline of a 5.4% decline.  The bulk of the production declines continue within the Southeast region which is responsible for producing a majority of Australia’s milk.  Our current forecast for Australia’s 16/17 season projects overall milk production to decline by 7.3% year over year, though if current conditions persist that number could be slightly higher.  The recovery of the Australian milk shed has lagged behind other larger global production regions has farmers continue to face adversity in the guise of weather and financial constraints which is leading some producers to leave the business altogether.    

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We expect Class III and cheese to open lower this morning.

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NFDM & Butter

NFDM futures tallied gains of up to 1.25 cents in the 2017 contracts riding the results of Tuesday’s GDT auction for a second day in a row.  With the 1.75 gain posted during the spot session the futures contracts added premium into the forward curve.  Despite talk of physical trades occurring below the value of the nearby futures contracts, market participants are leaning on the higher reported prices from the weekly NDPSR than the value of the spot market to guide trading activity. 

Butter futures inched lower ahead of the Cold Storage Report for the month of February, but the results of that report should pressure contract values lower today.  Butter stocks were estimated to have reached 282.62 million pounds, higher than our expectations while increasing by 20.12% from January and by 13.75% year over year, adjusting for the leap year.  The forward curve of the futures market is vulnerable today as producers and sell side interests will look to step into the market to capture value in the lower demand months.  If the seasonal trends remain intact butter stocks have the potential to reach a record level later this year. 

We look for NFDM to open steady with butter moving lower. 

Grains

Corn futures drifted lower yesterday as the May contract reached its lowest value of the year.  Estimates were released for the upcoming acreage survey with guesses ranging from 88 to 94 mln acres, FCStone calling for 91.6 mln.  The 91.6 mln acre figure matched with a trend yield and demand base would result in a carryout 300 mln bushels greater than last year.  Next Friday will also see the release of the stocks report which will highlight the annual feed/residual use for 2016. 

The soybean contracts remain in a range bound trade ahead of next week’s USDA report.  FCStone is projecting the spring soybean planted acreage to reach 87.3 mln, 700,000 below the Ag Forum’s 88-million-acre estimate.  Coupling the 87.3 mln acre estimate with a trend line yield and demand base would project the carryout to remain stable at 420 mln bushels.  South American weather is seen as cooperative with crop development. 

Wheat futures traded lower with the nearby contracts approaching their lowest prices of the year.  The US Southern Plains are forecast to receive beneficial rains over the next two weeks.  The recent drop in wheat prices has brought the US sourced crop onto competitive footing with other global producers for export demand.  

We expect the grains to open moderately lower today.  

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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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