Morning Dairy Comments, 05/23/2017

Tuesday, May 23, 2017

General Market News

· Wall Street set to open higher ahead of Trump’s budget plan

· Fury grows at volume threshold set for EU dairy support scheme

· Australia’s dairy farmers hold on to bobby calves as beef prices remain high

· Heavy rains are turning US corn fields into lakes


Class III & Cheese

An early morning bounce for Class III and Cheese futures ended after the price of block cheese dropped 2 cents during the spot call yesterday. Barrel cheese traded lower, but found support and closed a penny higher on the day. The mixed spot call injected a dose of doubt into the market and futures retreated back towards unchanged on the day.

It wasn’t until after the USDA delivered their April Cold Storage numbers yesterday afternoon that prices turned modestly negative. At 835 million lbs., American cheese inventories exceeded expectations soaring 13.7% above last April and 4.1% above last month. The Other cheese category arrived at 499 million lbs., which was slightly below our expectation of 503 million lbs. All of this is to say that Total Cheese in storage was about 10 million lbs. heavier than we expected at 1.334 million lbs.

These are big, bearish cheese numbers. But with spot loads of block 29 cents above the 2017 low and the price of barrels finding support 13 cents above its 2017 low, are there bigger fish to fry than this report? We’d expect futures to open softer this morning, but how much should we focus on US inventories from a month ago?
With global butterfat prices still well supported at much higher levels than would normally be expected, maybe we ought to be asking ourselves other questions. Like, how will cheese production in Europe fare over the next couple of months? Or, why are US spot prices able to rise during one of the greatest cheddar cheese builds in US history? To us, these questions are more important in determining market direction going forward than static inventories in US storage from a month ago.



For today, we’d expect some weakness off of yesterday’s report. Big numbers like what the USDA delivered will promote doubt by speculative longs while calming commercial hedgers, many of whom are still looking for a place to get long in the second half. Meanwhile, yesterday’s Cold Storage number also makes the $17.00 mark for July to December Class III look rather attractive to producers. Some market congestion is expected around current levels today. We’ll see if spot trading has any impact.

NFDM & Butter

The butter market is going to wrestle with another round of do we trade the number or the expectations? At 292 million lbs. in storage, we’d be hard pressed to say that the absolute number is bullish. But with many market participants expecting north to well-north of 300 million lbs. in storage, the USDA number is not the colossal butter build of imagination.

Yesterday butter futures gave up the ghost so to speak – closing limit down in 5 of 8 months thru January – as spot price weakness ushered in a desire to strip out forward curve premium. Looks like longs dumped some positions to new buyers as Open Interest declined by 3 contracts. Futures bounced following the report, so we’d expect more of a mixed trade ahead of spot today.

If it looks like a bull and snorts like a bull, then it’s a bull. That seems to be the theme for the NFDM market these days. The market seems to be saying, “Forget what you hear and look at what I’m doing.” Perhaps this is some sort of modest, pre-summer bump for futures. Perhaps it will be short-lived. We hear demand is improving and that’s leading to a slight adjustment of powder trader mindset. But sometimes looking at a chart and simply keeping in mind that often times when prices are going from the lower-left to the upper-right, there is a bullish trend in place.

Q3 NFDM – Daily Chart



The grain markets closed moderately higher on Monday as the slide in the USD continued. Corn finished up 2.5 cents at $3.75, beans were up 3.5 cents at $9.5650 and wheat prices were down a penny at $4.3425. The weather forecasts are a bit wetter for the next week though rain totals were less than expected over the weekend.
There remains some weather risk, but after the close corn planting progress was reported as 84% completed which matched last year’s progress and was just 1% below the 5 year average. Soybeans were 53% completed matching last year’s progress and 1% ahead of the 5 year average.
The currency movement we’ve seen over the past few weeks has really triggered a lot of farmer selling from South America. Prices have jumped nearly 50 cents in terms of the Brazilian currency over the past few weeks and a sizable gain has been seen in soybeans as well despite domestic market price pressure.
Assuming planting progress continues and in spite of the weaker USD it’s difficult to get bullish short term but given the lower carryouts expected by the USDA for both corn and wheat, the upside risk remains strong. The fund short continues to be sizeable so any turn in the weather would open up significant upside in the form of short covering.



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