Morning Dairy Comments, 05/17/2017

Wednesday, May 17, 2017

Obstacles are those frightening things that become visible when we take our eyes off our goals." - Henry Ford


General Market News

  • USD continues to slide, down over 800 points yesterday and falling again this morning
  • Generally speaking the slide in the USD is bullish commodities but crude oil actually finished lower on the day yesterday
  • NZ cow numbers up 133k to 6.6 mln:
  • NZ & Australia seeing strong demand for dairy heifers:



Class III & Cheese

It was an interesting up and down session for the class III markets on Tuesday. Initially prices were mixed but firmed into the spot session which saw prices advance in sympathy with GDT and the class IV futures but the recent strength was met with some sell side interest as the day wore on and futures finished steady to 12 higher but by the 4 pm electronic close a number of months were actually lower on the day. We’re seemingly in a tight spot at the moment with milk production still flowing and seemingly quite a number of loads available as evidenced by the 4 block trades and 19 barrel trades seen on spot but we’re also coming to the end of the flush and warmer temps are likely ahead. The market seems to be struggling with how much we need to rise in the short term vs. how much additional demand we will see come our seasonal peak in Sept-Oct. Fundamentals from what we can unearth seem to be mixed but still relatively firm while the technical picture remains bullish. Below we include the 3 month July to September cheese pack average. This chart certainly has the look of trying to retest the early year highs just shy of the $1.80 mark some 6 to 7 cents above the current market. We are however very overbought and could see a pause to refresh the bull run in the coming sessions. In our opinion a lot of the short term answers will be driven by what transpires in the butter market in the short term. See our full analysis in the butter & NFDM section below.


Cheese futures actually did settle mixed yesterday from -0.002 to +0.006 as the whey market gains of 0.500 to 0.775 cents continues to support class III. The backwardation continues to work its way out of the whey market but it will take some time for that to continue to occur. Cheese may not have to carry the entire burden of competing against the class IV market where spreads have gone from nearly $2.00 with class III above class IV just a few sessions ago to yesterday where the largest differential was class III just 80 cents above its class IV counter-part contract yesterday. If more milk moves into the class IV market with the spreads re-aligning it should slow the butter rally but may lead to a lower NFDM market. We can’t say for sure but we have our doubts as to how bullish it would be for cheese at least in the short term.



NFDM & Butter

A continued explosion was seen for butter prices after the GDT auction saw prices jump by 8.2% for AMF & 11.2% for butter. That pushes the NZ equivalents for fat to nearly $2.50 and with reports out of the EU of prices very near that range the strength we’ve seen of late in the in the US markets seems reasonable. Interestingly though the spreads between the international market and the US has really tightened up now and that may have been the reason we saw bigger volume on the spot market today with 8 trades taking place. When we are at a 15 cent or so discount it becomes reasonable to expect the US exports to pick up but this recent rally has seen that spread tighten up to around 5 to 10 cents and that could be reason enough for some weakness in the domestic markets. Below we include a chart of the rally seen in June last year vs. the rally we’ve seen this year. Following that sharp spike the market cooled off and slipped back. There is a lot more international price support this time around but we wonder if a similar pattern might be seen this year with perhaps a second rally coming during our holiday demand period. Suffice to say we will be watching closely the market reaction to GDT & follow through for both the NZX & the CME. So far the NZX was very strong with prices up 300 to 600 per ton and CME futures overnight followed through with gains of 1 to 7 cents.


NFDM prices also found support from the GDT auction as seemingly most expectations were for SMP to actually finish lower. SMP followed in sympathy with the butter market gains and finished slightly higher. The forward curve results are interesting with GDT prices seemingly flat in the 90 to 92 cent range all the way to October while CME futures closed over $1.00 yesterday for October and NZX futures sit just shy of the $1.00 mark as well. While milk prices feel very firm at the moment most we speak with in the physical market seem to struggle envisioning that much strength but we’ll continue to price in a cost of carry until the upside momentum for the spot markets is slowed. Weekly CWAP prices were up by 1.21 cents this week to 86.69 cents volumes remained in the single digits with 8.9 million pounds this week.



Grains prices finished mostly higher on Tuesday as you’d expect with a softer USD like we saw yesterday. However, the gains were really only seen for the soybean market which finished up 11 cents in May at $9.7625 while corn was unchanged at $3.6775 and wheat prices were up a penny to $4.2425. Corn planting has progressed nicely and beans are lagging a bit so good rains coming into the majority of the corn belt for tonight and tomorrow likely drove the majority of the price action. We’re not sure there is any significant need to add risk for soybeans but that was the modus yesterday as the funds continue to cut their net short positions and are estimated at nearly flat after yesterday’s activity vs. a corn short of near 200k contracts and a wheat short of some 120k contracts. Ultimately once these crops are in the ground the warmer temps and moderate rains should be supportive of a strong yield potential so we don’t look for any trend to develop for these markets in the short term.


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