Morning Dairy Comments, 04/28/2017

Friday, April 28, 2017

General Market News

· U.S. first-quarter growth weakest in three years as consumer spending falters

· Higher cash prices propel Live Cattle futures to 1-year high

· What traders need to watch in the Canada dairy dispute

· Oil rebounds from one-month low on hopes for output cut extension

· Domino’s Pizza reports another quarter of strong U.S. sales growth

· Cleveland Browns pick Myles Garrett first in NFL Draft



Class III, Cheese, and Whey

What got into the dairy complex yesterday? Before we simply chalk it up to a “NAFTA shuffle” (as one client coined it), let’s back up and take a look at the week.

There seemed to be two camps of thought at the ADPI conference earlier this week in Chicago: either people were bearish or they we’re neutral. We didn’t hear much in the way of bullish – at least anytime soon. For better or worse, trade uncertainties in general and milk glut issues in Wisconsin in particular are leading indicators of U.S. dairy market sentiment at large right now. So the views of dairy market prices are, we could say, largely bearish.

Enter President Trump’s comment on NAFTA mid-Wednesday. Although we all tried to figure out if it was “fake news”, the reality is there was no knee-jerk reaction to the dairy markets. Dairy prices didn’t fall out of bed in some sort of panicked, end-of-trade-as-we-know-it sell off.
Can we really chalk up yesterday’s rally to NAFTA-talk? Given the sort of widespread bump in dairy futures prices at large, we’d say yes – at least partially. 

The President’s willingness to work with Canada and Mexico was like a breath of fresh air to dairy market participants who have long dealt with anti-trade rhetoric and uncertainty this year. But was there was more to yesterday’s Class III rally?
We think so. There were a few large Class III options trades in the July to December timeframe transacted yesterday that likely lent a hand to futures buy side interests. As traders put on new option positions they will, from time to time, look to counterbalance certain those trades with futures positions. In this case, it seemed that such a dynamic played a role in the bounce for Class III yesterday. The sellers of call options may have turned around and bought futures.

So where do we go from here? Well, one day up doesn’t change the overall trend of dairy prices. And technically we’re still somewhat caught in a sideways trade. But we’d expect that if on par the majority of the news is still bearish AND prices can stage a rally, the path of least resistance for futures may be turning back to the upside.

A significant storm system is expected to develop across the central Plains over the next two days, which will spread heavy rains into the central and eastern Plains. Meanwhile, colder air wrapping in behind the storm on Saturday and Sunday will change the rain to snow, and some significant snowfall accumulations will be likely, especially in central and western Nebraska, western Kansas, southeastern Colorado, western Oklahoma, and far northwest Texas. Be safe out there.

For the week ending April 15, dairy cow slaughter under federal inspection was down 0.9% at 54,100 head, compared with the same period the previous year. Year-to-date slaughter levels are 0.9% higher than 2016 levels, with 909,400 head slaughtered. We expect Class III and Cheese to open mostly lower this morning. Dry Whey looks to open mixed.



NFDM & Butter

NFDM futures saw a strong rally yesterday on a very active spot market. 21 loads traded hands yesterday with spot gaining 2 ½ cents. Though values were higher, there seems to be willing sellers of product. How much more do they have to sell? We don’t know. The NAFTA talk may be a Band-Aid for powder market bulls, but the supply seems to be there today. That being said, it’s interesting to note that NZX WMP futures ended the week on a lower note, while SMP was steady.


The Dairy Market News Western Mostly NFDM price was up 0.50 cents from the previous week at 84 cents per pound. Last week’s CA Weighted Average price was $0.8306, down 2.21 cents from the previous week. The CME Grade A NFDM price is up 3 cents from last Thursday at $0.8775. There were 25 trades ranging from $0.8450 to $0.8850.

Spot butter moved back over $2.10 yesterday, up 2.25 cents to $2.12 as the back-and-forth beat goes on. Cream seems to be widely available and moving to the churns, but the butter market still seems to be somewhat on pins and needles as world prices stay aloft. Given our inventories in March and the expectation that we will build on those numbers in April, the market may again try to edge into the low-$2.00 range in the coming week or two. But as we move through May ice cream demand any modest change in butterfat demand – real or perceived – seems able to provide support to both spot and futures.

The CME Grade AA butter price was up 5.25 cents from last Thursday at $2.1200, with 22 loads changing hands. Traded prices ranged from $2.0750 to $2.1500.

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


Unlike dairy, corn futures sold off (down 5) Wednesday on the anti-NAFTA talk. Since then prices have rebounded somewhat on light short-covering by speculative funds as July Corn Open Interest fell yesterday. With good export sales, a weakening U.S. dollar and cold weather forecast in the western Plains (as well as in EU, which could be a dairy story at some point too), we don’t see tremendous downside for corn right now.

June US Dollar Index – Daily Chart


Soybean export sales rose to a 3+ month high this week at nearly 30 million bushels, nearly four times both the previous week and the comparable week last year. Cumulative sales now stand at 2.074 billion bushels, up over 407 mbu from last year’s pace through less than two-thirds of the 2016/17 marketing year.


Corn and bean calls are for a slightly lower opening 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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