Dairy Early Morning Update, 7/20/17

Thursday, July 20, 2017


General Market News

Class III & Cheese

Sharp selling pressure kicked off Wednesday’s Class III trade with the market trading aorund 20 cents lower thru December ahead of the pit open. The selling sent Cheese futures lower as well in what now appears to be a retest of last week’s low price prints for several contract months. Ultimately the market held and slowly recovered some ground before finishing mostly lower – but off the lows. Options volume dropped off a bit from day prior, but showed a skew to good call option activity once again. Spot prices remained rather stable, with a good two-sided trade in barrels (12 loads traded vs. 2 in blocks).

As for today, market participants turn their attention to the June Milk Producition report. There was a lot of chatter around milk production in June as it was the first month this year that weather dealt a blow to dairy animals out West. Those discussions have died down a bit so far in July. We feel rather confident that California production is going to be reported lower in June, but the question we ought to be asking is by how much? A corrolary to that would be to ask whether or not the markets have actually priced in any of the losses out West.

The heatwave in question ran from about June 16 until about June 26. As you can see below, the price of September Class III (as a proxy for the market as a whole) was  mostly lower during that time. That, in our opinion, is because the futures market (and spot for that matter) has been trading the excesses in the upper Midwest (or more broadly East of the Rockies milk and cheese). Although futures have run a premium to spot the entire time, we wonder if the market did a good enough job pricing in the production problems West of the rockies. We will find out over the next 24 hours.

September Class III – Daily Chart


We look for the dairy complex to open steady-mixed this morning.
























UP ¾ 







DOWN 1 ¼ 



NFDM & Butter

The spot NFDM market inched up ¾ cent to 86 cents ($1,896/mt) on Wednesday with 8 loads trading hands. US exports in May were 58.7k MT or about 129.4 mil pounds. YTD US exports are up 22% over 2016’s pace. Exports have been welcomed, but the domestic end user has been a nimble buyer this year. They have been consistently rewarded staying in the spot market over the past 3 years buying hand to mouth. This has caused domestic disappearance to disappoint thus the US is sitting on record stocks of 127.9k MT or 282 mil pounds. High butter prices will incentive global operators to move milk when and where possible into the dryer vs the cheese vats. Currently a CME spot price around 86 cents is competitive compared to EU prices of €1,785/mt or about 93 cents equivalent. (See EU SMP/butter quotes in table below)

ECB President, Mario Draghi, kept interest rates unchanged this morning. The Euro (See chart) initially faded weaker to the news, but is now pushing to top the key $1.16 number which may open up for more strength.

Spot butter was down 1 ¼ cent to $2.6325 yesterday. Market players continue to closely monitor EU prices with are now $3.20+/lb for 82% fat. See the chart below comparing the October EEX and CME butter futures. That big spread is on everyone’s mind. In our opinion, it won’t take much exports from the US to tighten are stocks considerably. Remember the US has been a net importer of fat the past couple years with prices above $2/pound. The US no longer has the luxury of being a net importer with the current pricing dynamics.

Oct 2017 EEX Butter futures (BLACK) vs  Oct 2017 CME Butter futures (Green):




December new crop corn futures bounced higher yesterday with the trade expecting the funds added 11k contracts to their net long position of about 88k, (See chart below). This morning the futures are bid up above the $4.00 level on the chart below. It’s all about the hot and dry weather models, and the farmer is a bit more confident holding on to his old crop corn waiting to sell into another rally.

December Corn – Daily Charts


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