Morning Dairy Comments, 05/22/2017

Monday, May 22, 2017


General Market News

· Huge cuts to food stamps part of Trump’s budget proposal https://goo.gl/0uGTF9

· Got Milk? Too much of it, say US dairy farmers https://goo.gl/CUjsdf

· Oil producers set to extend cuts as rally stalls https://goo.gl/5z021T

· Glanbia shareholders approve sale of Dairy Ireland https://goo.gl/wqa8f5

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Class III & Cheese

Both Class III and Cheese futures firmed into Friday’s close, which is not completely unusual ahead of a milk production report. Block cheese rose by 1.75 cents Friday, helping to underpin futures. Dry whey also lent a supportive hand as most contracts we’re unchanged to modestly higher Friday.

On the next page you can read our comment following the slightly bearish April production report. We originally called for a slightly softer opening Sunday night into Monday, but have yet to see a softer trade materialize. Many times it’s more important how a market trades the data as opposed to the data itself. In this case, we’ll watch today’s close for insight into market direction.

April Milk Production

US milk production for April arrived up 2.0% compared to our forecast of 1.9%. For all intents and purposes, total milk production came in at forecast, but the number of dairy cows was higher than forecast while production per cow was lower than forecast. The USDA also revised up production for March by 30 million pounds (+0.16%) with both cow numbers and production per cow being revised higher.

While total production was slightly higher than expected, the most bearish item in the report is the continued gains in the size of the dairy herd. The USDA estimates that in March US farmers added 17,000 head to the herd, followed by another 8,000 in April. The herd is now up 55,000 head since October. In the next 12 months, those cows will produce roughly 1.2 billion pounds of milk. If it all goes to cheese, it would be roughly 120 million pounds of cheese, or an extra 0.375 pounds for every man, woman, and child in America. Basically, everyone in American needs to eat an extra pizza this year to absorb the milk coming from those 55,000 cows. Most of the gains in the herd are still coming from the South Central region where much of the processing capacity is geared toward cheese.

With production close to forecast, the report doesn’t change our expectations much and it is probably not a market mover, but with the herd continually growing, if production per cow starts to improve, there is some risk of 2%+ production running out through late 2017.

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NFDM & Butter

NFDM futures continued to press recent high price prints Friday.  Volumes we’re moderate (174 contracts) and Open Interest rose by just 9 contracts. The spot price rose to a 3-month high of 91.50 on 4 trades with a good smattering of bids and offers left on the board. The market continues to receive the bearish end of discussions amongst market participants, but the prices have become quite well supported over the past few weeks. New demand – particularly from Mexico – has heated up over the past few weeks and is at least one factor in the strength.
On the other hand, since May 1 spot NFDM has risen 5.5 cents (7 cents from the May low on May 5). In the same time most 2017 NFDM futures have risen 4-7 cents. Interestingly, in that same time Open Interest in the NFDM futures has dropped 301 contracts. So new hedge demand may be alive and well (particularly for near-term delivery) but looking a little closer at futures, the price move seems to be driven at least in part by short-covering. No blow out short-covering bounce here. Just a steady desire to pair back positions – particularly short positions - as divergence between bearish discussion and bullish price action lead to some trader confusion/frustration.
Butter finished mostly lower Friday as the spot market fell 2.5 cents. Global stocks remain tight, but the US market is trying to find a home around the $2.40 level for the moment. We expect sell side interest to continue for spot, but not looking for any significant declines to price today. Futures volatility ought to continue here, but the market was quiet overnight.

Grains

Grains are in the midst of a weather market, which has been relatively subdued so far this year. But there was another round of rain around the Midwest, which is keeping a firm bid for Corn and Soybean markets as planting delays will be the talk of LaSalle Street today. The other aspect concerning traders is centered around questions of ‘replanting’. How much of a replant and how will this play out? Will we have enough seeds in enough places to stave off a material decline in Corn acres? Perhaps we’ll get an opening of dry weather to assess and replant in short order. But until we have some certainty around that, look for more strength in grains. The US dollar continues to weaken this morning and technical indicators are pointing up.

Most end-users of grain have coverage thru September/October. Be careful around new crop. If you don’t have at least some physical or option coverage for new crop, you may want to revisit this. Generally mid-May is not the time to be adding coverage, but in this case we’d recommend some additional coverage for new crop corn and bean-meal.

December Corn – Monthly Chart

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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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