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Morning Dairy Comments, 05/30/2017

Tuesday, May 30, 2017


General Market News

· U.S. bombers carry out drill near North Korean border after Pyongyang’s missile launch

· Consumer Spending up 0.4% as expected

· A new food label will tell you more about the animals you eat https://goo.gl/FBLfCv

· Weaker dollar to boost US dairy exports https://goo.gl/ReHCCE

· White House communications director, Mike Dubake, quits

Class III & Cheese

After trading higher early Friday, Class III and Cheese futures reversed course as light profit taking ahead of the weekend turned to fresh selling. Spot cheese was the driving force. Even though block cheese edged out another 1.25 cent gain, the 4 cent drop for barrel cheese had producers and some other new sellers jumping in to grab some $17.00+ prices.
Just two months ago, the July Class III contract was trading $15.90. With feed prices generally reasonable and profit margin nicely etched into the forward curve, increased producer selling makes sense? As a dairy farmer, stripping out price volatility and bringing home a profit to the dairy is the name of the game. But does that mean that prices have topped out?
We don’t know.
Calling a longer-term top (or bottom) is often near impossible. And since most market participants are surprised by this recent Class III and Cheese rally as it is, phrases like “Cheese can’t….” or “Class III shouldn’t…” or the like will not be in our comments.

There are a host of reasons (cheese supply, for starters) we could cite that would suggest the futures could be characterized as over-valued. But that doesn’t mean that they are. The only thing we can know for certain today is whether or not the current prices allow your business to be profitable. Outside of that, we’re in the midst of a market that is stronger (generally) than expected. And because of that, we would expect that the fundamental news going forward would be less bearish and more bullish. Markets don’t generally go higher without some sort of fundamental driver. The difficulty is that the fundamental news tends to follow price action – not the other way around.

Class III and Cheese futures were quieter overnight. We’d expect a mixed to weaker start today. Follow-thru selling from Friday may be par for the course as there was little in the way to spook the market higher over the weekend. It will take a few days to see what kind of sales we’re seen – and what kind of pipeline refill maybe needed – after people fired up grills during the long weekend.

Argentina’s exports were a little lower than expected, down 58.8% compared to the forecast of -50.3%. While it is a huge drop in percentage terms, in tonnage terms exports were down 118,000 MT from last April. If US exports were down 118k tons, they would only be down about 11% or if EU exports were down that much it would only be a 6% drop. So the drop in tonnage isn’t huge relative to total global trade, but it is still a significant amount of product.

We’re not sure a lot of people are paying close attention to what is happening in Argentina. Their exports to Brazil and Russia will likely continue to run at a decent pace, which means shipments to everyone else are going to be light. So far Algeria and China haven’t had a problem sourcing products from other countries. Their purchases from Argentina are more opportunistic than Brazil and Russia. It still looks like there is going to be plenty of product (well, maybe not butter) available from other parts of the world, so the drop in AR exports isn’t a huge price driver, but if we turn out tight elsewhere in the second half of the year, then the lack of product in Argentina starts to be important to the price story.

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NFDM & Butter

Friday’s spot NFDM session was ¼ cent lower to 92 ¾ cents on zero trades. The NFDM futures on the CME were slightly weaker on low volumes ahead of the holiday weekend. Below the Q3 2017 NFDM futures chart has hit some resistance at $1.00/lb. It appears in the month of May we have seen increased demand as end users are more confident to step back in. It seemed the market was pretty range-bound in March and April as market participants expected another wave of powder to enter the EU’s warehouses. The anticipation of the intervention program probably caused a sense of complacency amongst the buyers, which are becoming a bit more receptive to adding coverage now.

NFDM Q3 – Daily Chart

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The butter spot call was down 2 cents to $2.36 on 4 trades. Butter futures were mixed in a tight trading range. Looking at the Q3 butter futures chart below it can be argued the market still has support underneath it. The futures have made an attempt at a break lower but were bid back up on strong demand. One thing to recognize is most of the weaker hands who were short have likely bailed out of the positions by this point. The lack of urgency and fear from those who hold short positions may keep the butter futures in check in the short term. For your reference, European butter futures on the EEX are trading at about €5,400/mt or about $2.74 for 82% fat butter. It’s likely the CME butter futures will remain at a substantial discount to stay attractive in the export markets.

Grains

Corn and Wheat both finished higher as final plant date has passed for all but the top 5 producing states (Iowa, Minnesota, South Dakota, North Dakota and Wisconsin), which all have 5 days left until planting delays will start incurring losses in coverage. Lost acre discussions will continue to circulate which could underpin markets.  Funds were estimated to have bought 8000 contracts Friday.

November Soybean – Daily Chart
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Technical chart damage emboldened the funds pushing the soybeans another 13 cents lower finishing down 26+ cents last week.  Delayed plantings in corn could shift acres to soybeans giving more fuel to the fund fire.   Funds sold 8000 soybeans, 4000 oil and 4000 meal to finish the week.

Wheat finished higher on concerns of declining quality.  The mid-range weather forecasts continue to show wet weather.  Funds were credited with buying 4000 contracts.


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