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Morning Dairy Comments, 05/19/2017

Friday, May 19, 2017


General Market News

· ***April Milk Production @ 2PM today***

· Dollar remains weak as beating eases for global stocks https://goo.gl/9srRUv

· Oil rises to 3-week high as OPEC members back cuts extension https://goo.gl/qHpnMP

· Danone eyes 2020 operating margin of above 16% https://goo.gl/vPHkSj

· Low dairy consumption tied to risk of early menopause https://goo.gl/jD3Q7n

· National Restaurant Show kicks off this weekend in Chicago

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Class III & Cheese

“Contracts just changing hands” seems an unusual way to describe yesterday’s activity, but that seemed to be the theme. Class III volume registered 1,447 trades – Open Interest fell by 1 contract. Cheese volume registered at 468 trades – Open Interest fell by 3 contracts. There’s not much of a story here so we won’t force some elaborate scheme on you this morning except to say that moderate volumes and no change in Open Interest would tend to suggest some modicum of equilibrium for futures prices at the moment.
Futures were both somewhat lower – particularly nearby – which is a direct result of more sell pressure during spot. But chatter around better US cheese demand and international tire-kicking leaves the market somewhat on edge. How much support will we really see here or, perhaps, a better question: are we etching out some level of balance around current levels? We expect the latter for today as the market between $1.50 and $1.65 for both blocks and barrels seems to be an appropriate – albeit somewhat wide - level for now.

There is one theme we’d like to remind people before the weekend. The news on cheese seems relatively bearish. We’re seeing some sprouts of new demand, but they seemed to be followed by “milk is still going for $5 or $6 under in parts of Wisconsin”, or “storage remains tight” comments. On the flip side, the price movement for futures since the beginning of May has a more bullish tilt to it. Prices can bounce in bear markets, but in this case price action has eclipsed the March highs, ushering in a more bullish technical set-up. Bearish news + Bullish price action = increased market volatility and, more importantly, the beginning stages of a possible change in 2017 market direction.

Q3 Class III – Daily Chart

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Midwest temperatures fell from a balmy and breezy 80 degrees yesterday to a very cow friendly 40 degrees this morning. Meanwhile, California’s Central Valley is expected push 100 degrees this weekend. Overnight temps shouldn’t eclipse the 70 degree mark yet, but if this warming spell is anything like the one a couple of weeks ago it could be more humid than normal. We hear this won’t result in a dramatic impact on cows out there, but we think it may be safe to say that peak milk flows out of California this year are likely behind us.

For the week ending May 6, dairy cow slaughter under federal inspection was up 4.6% at 54,900 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.5% higher than 2016 levels, with 1,076,200 head slaughtered.
The USDA will deliver the April Milk Production report this afternoon. We’re looking for a 1.9% increase in milk production and believe that the market is looking for a similar number. We’ll have to get a look at any revisions from last month – particularly on the cow numbers – but overall a 1.9% increase from last year would be a rather ho-hum number. Most expect US production to be up 2% this year. Anything short of 1.5% or north of 2.5% would likely have a bigger impact on the futures forward curves.

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NFDM & Butter

The butter market took a breather yesterday as the market traded mixed intraday before most contracts finished modestly lower even as spot butter rose by 5.5 cents to $2.40. Butter futures are point towards some level of near-term equilibrium around the mid $2.40 range.

NFDM edged higher for an eighth day Thursday before the May-July timeframe finished modestly lower. August and beyond remains mostly firm and continues to flirt, or establish, new price highs for the recent move - price levels not seen since mid-late February.
It seems that some short-covering may be the culprit up front, but deferred contracts continue to garner attention from commercial buyers (and possibly some new speculative buyers). All of this doesn’t change the rather large inventories we discuss on a regular basis, but here again we have a divergence between the data and the price action. Data is largely bearish, but price action is firm and looking upward. A run of the mill bear market correction or a change in trend? The jury is still out, but the risk in our eyes is to the upside for powder prices.

Grains

Grains are retracing a bit of yesterday’s losses as traders inject some premium back into the market after yesterday’s “risk-off” affair that saw beans tank 25-30 cents on news of fresh corruption in Brazilian politics. That had the market prepping for a wave of South American beans to hit the export market however, that’s not the only aspect to consider here and for the time being, less than ideal weather conditions are taking center stage. As the calendar pushes deeper into May, farmers will need to see a window of to get the balance of the crop planted or final yields will become a topic of discussion. That lifted beans about a nickel higher overnight, which boosted corn and wheat 2-3 cents into the green.

Technically speaking, yesterday’s bean action saw The psychological $9.50 marker breached however no real chart damage was incurred as the April lows remained intact. Corn fared a bit better as it was able to hold its 200-day moving average (black line on chart below) and found some follow-through support overnight. Both corn and beans are in “weather markets”, which has the potential to spike volatility at a moment’s notice as forecasts change.

Grains are opening higher this morning. End-users have the green light to get new crop corn and bean meal coverage. Call to discuss.

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