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Morning Dairy Comments, 04/27/2017

Thursday, April 27, 2017


General Market News

· Trump rules out swift Nafta exit, favors renegotiation https://goo.gl/h89XeK

· NZ dairy expansion will hit limits, must chase value https://goo.gl/1dWBl7

· Oil prices fall on oversupply https://goo.gl/AyJHi1

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Class III, Cheese, and Whey

It was an extremely active spot cheese session, at least for the barrels yesterday, with 10 trades taking place as the market fell by ¾ of a cent. The blocks were also lower  on the day though no trades took place there. The market took the activity as bearish but given the size of the sell off on Tuesday was hesitant to trade sharply lower and in fact settled mixed on the day..

For the first time in a long time the spot and futures markets are essentially in lock step with spot equivalents around ~$15.40 and May and June each settled in the $15.30’s. While there was plenty of discussion about the cheese markets the past few days there was little in regards to consensus. The wide block/barrel spread (12.25 cents at settlement yesterday) is seemingly back up with most participants noting a tightness in the block but barrels being readily available. That trend has clearly been reflected in the volumes transacted at the spot exchange the past week plus. Until we get through the flush it seems downside is more logical than a bounce, but the market is currently trading in a more sideways, range-bound fashion. In fact, futures firmed overnight.

Whey futures saw similar movement to the class III market with May through July settling slightly lower while the deferred contracts were 0.075 to 1.675 higher on the day. Possibly attempting to flatten out the forward curve a bit. Volume was strong with over 150 trades taking place on the day and was well spread out through the 2017 contracts and Q1 2018 seeing some activity as well.

Cheese futures traded good volume as well with 360 trades occurring on the day with settlements mostly lower but mixed from -0.007 to +0.006. While class III was more mixed, mostly due to dry whey, the carry looks to be coming out of the cheese market at the moment. We expect continued pressure though hedge interest in the back half of the year around the $1.70 mark.
According to the New York Times yesterday, President Trump told the leaders of Mexico and Canada on Wednesday that he would not immediately move to terminate the North American Free Trade Agreement, only hours after an administration official said he was likely to sign an order that would begin the process of pulling the United States out of the deal.”

We don’t know what truly motivates the President, but we’d like to think he has smart people around him. Perhaps the idea is to gain some bargaining power somewhere, but “likely to sign an order that would begin the process of pulling the United States out of the deal” is one of those comments you need to pause and think about when you read it. There are trade risks no doubt, but upending NAFTA with the stroke of a pen is not something we are prepared to take at face value.

We expect Class III and Cheese and Dry Whey to open mixed this morning.

 

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NFDM & Butter

NFDM futures traded heavy volumes today with nearly 170 trades taking place in April. From there things were relatively light in terms of activity. Settlements were mostly lower with May down 1.675 cents and Sept down 1.300 cents. The spot market has gone relatively quiet but it seems product is moving pretty readily at the moment though most seem to have a tough time seeing continued upside on futures in the low 90’s for the coming months. The question seems to be after the recent buying activity will we see a continued push to secure product. That seems a 50/50 proposition at the moment so look for futures to take a wait and see approach for now.

The butter market saw spot trade lower today after the pop yesterday. Settlement was $2.0975 with only a single trade taking place after the sizeable volume seen yesterday. Interestingly the futures market was mostly higher on the day with gains of steady to +1.250 cents from June through 2018 contracts. One theme we sensed the past few days was that there is still a healthy respect for the upside potential for butter at the tail end of 2017. 

New Zealand’s milk solids production came in better than expected for March, up 9.9% compared to a forecast of just +2.8%. The 9.9% growth sounds huge, but on a pound basis, production was up about 220 million pounds (on liquid milk basis) which would be something like 1.3% growth in the US or about 0.7% growth in the EU28. So the overall volume increase isn’t overly bearish, but the increase was more than expected and it’s hard not to feel bearish looking at that headline 9.9% increase. It’s clear the weather improved in February/March, but the big question is how did the heavy rains and flooding impacting production in April/May to finish off the season.

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We expect NFDM to open lower, Butter and Class IV mixed.

Grains

The grain markets were mostly lower yesterday as rains failed to develop and the medium-term weather maps showed a dry gap where planting can be done. Funds were big sellers in corn ~20k contracts and beans ~10k contracts. Export sales will be released later this morning and expectations are for continued weakness in our total sales. For now this market seems as simple as weather and wetness is seen as an impediment to getting grains planted and thus bullish if we have some windows of dryness the crops will get planted and the wet weather likely becomes bearish as our crop prospects should improve.

We look for the grains to open modestly higher.


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