Morning Dairy Comments, 11/05/2015

Thursday, November 05, 2015

That which is not good for the bee-hive cannot be good for the bees." –Marcus Aurelius



General Market News

· U.S. trade deficit sinks 15% in September but exports remain soft

· China stocks enter bull-market territory

· More California farmers trade dairy for nuts, analysts say

· EU predicts 'modest' economic recovery next year

· US weekly jobless claims total 276,000 vs 262,000 estimate



Class III, Cheese, and Whey

Mixed emotions would state it best as far as Class III and cheese futures are concerned. On one hand the bear that has dominated price action over the past month was put in the den, at least temporarily, however if the bull wanted to begin an upside campaign he missed and needs to double check that effort at the door. Yesterday's price action did little to drive home conviction even in the face of aggressive spot movement witnessed in the barrel market, which traded very actively to a premium to that of blocks. Nearby futures contracts did draw a line in the sand and were able to post gains, however the fact that upside was limited on heavy volume doesn't do much in the way of proving anything valid. This is likely the result of a couple of dynamics at play, 1) the fatigue factor, as the market has been in downtrend for an extended period of time and 2) it's now more of a show me first and the reaction comes later, as the trade is unwilling to commit. Not surprising given the fact that spot prices remain range bound and found traction at the lower edge of that range.  But how many times can we go up and down the bunny trail before hands go up into the air and the trade backs away in resignation? All that to say, it's apparent that market players aren't buying into what transpired yesterday, remaining content to let slippage occur with the idea being that price action will revert back to a state of fundamental normalcy sooner rather than later.

So what is "fundamental normalcy"? Have we traded that concept all year? The answer is yes and no. From a supportive perspective and outside of powder, the domestic market has remained rather insulated to the international climate, basically ignoring the global glut of milk and subsequent implosion of prices based on strong demand on the home front. That trend remains intact even as I write. Cheese has remained buoyant and butter on a steady drip of caffeine to say the least. The market is also taking into account existing weather threats that have yet to bring to bear the full ramifications. Will New Zealand dry up and wither, crimping production and increasing cull rates? Will El Nino deliver drought busting precip to drought stricken California? Will the dietary paradigm shift regarding fat intake ramp up, adding further support to the underlying market? All questions with bullish ramifications that have yet to play out and thus, the floor under the market remains intact as a certain amount of "risk premium" will be maintained.

On the flip side and on the bearish side of things...what about the robust cheese production that has transpired throughout 2015? Are demand levels really sufficient to comp the inventory? Considering the virtual destruction of our export capabilities, courtesy of the strong greenback, and conventional wisdom would point to a day of reckoning on that front. After all, it's been the Midwestern milk shed that has done the heavy lifting and that has contributed to cheese vats bursting at the seams and that only looks to continue. Also worth consideration is the China factor, or lack thereof, the fallout from the abolition of EU quotas, the extension of the Russian dairy ban, an unstable macroeconomic environment, and viola...upside potential remains capped.

I realize this is getting a bit long here, so to the point. The market has been in downtrend and it would be a tough sell to argue that point. Yes, cheese is readily available. Yes, all things remaining the same prices action is likely to remain suppressed. But let's be forward looking here and consider all that's been stated and known. Let's begin to focus on the outliers. What if California remains in drought, butter production suffers and demand continues to grow at a possible exponential rate? Think McDonalds and the QSR space as well as the embracing of natural fat intake on the dietary front. This will work to support Class III and cheese to a larger extent. What if El Nino brings on the hot and dry next summer and Midwestern states encounter a blip in production? That would also work grain prices higher and initially pinch dairy margins. That's just to name a few uncertainties.

At the end of the day, nobody knows what's going to transpire. My gut tells me Q1 could deal with the full brunt of the bear, fangs and claws in a last gasp move. Think salmon run on this one, as price action has the potential to get quite volatile as fear/panic strikes the market. But also be thinking of the recovery phase as well, because there are supportive elements that have the potential to awaken the bull and yesterday's price action may have been that warning shot across the bow. 

We look for class III and cheese to open mixed, whey to be steady

Spot Session Results


















UP 8 ¾ 







UP ¼     







UP 5




Class IV, Nonfat, and Butter Futures

The Class IV market saw mixed action yesterday as the trade balances chronic weakness in NFDM futures against a butter market that is clearly chugging Red Bulls, which may or may not have something mixed in with it. Either way, the spot price continues to march northbound, taking out the $2.85 level to settle a nickel higher at $2.8750. One has to wonder if the hangover effect isn't lingering somewhere nearby as the advance was on the back of a lone bid that appears to have sights set on the $3.00 mark. Either way, nearby futures were left with little choice but to track higher however sentiment was mixed in the deferred time frame.

On the other side of the coin, sellers continue to hack away at the NFDM market despite the uptick in the spot session. Futures volume was brisk, but nowhere near the 828 contracts that traded yesterday, and as indicated by the rise in open interest it appears fresh shorts are entering at these levels.

We expect a lower opening for NFDM, Butter steady

NZX Futures

Overnight saw record volume for NZX WMP futures, with 3220 lots trading. Price action was mixed, initially moving lower before ending the session flat to up $50. Two sets of block trades made up 2000 lots of the traded volume, with Q1 2016 the main focus overall (2320 lots) and Q2 taking a further 780 lots.  NZX SMP saw small volume in Dec15 (30 lots @ $2000) and Aug16 (20 lots @ $2570).



Grains traded soft overnight, giving back what had been a couple sessions of upside movement as the trade continues to grapple with harvest pressure, technical areas of resistance, fund activity, and the ensuing November USDA report which is scheduled for release next Tuesday. At this juncture there will likely continue to be headwinds facing the trade as a massive harvest is wrapping up with demand a big question mark moving forward, as the latest round of export numbers are not exactly what you'd call "robust". On the fundamental side and as far as corn is concerned, the farmer is finishing up in the field and putting it in the bin, which is working to firm up basis in hopes of higher prices down the road to sell into. Looking southbound, Argentine grain trade is slowing to a crawl this month, with the Rosario Exchange reportedly handling half the normal soybean volumes for this time of year and virtually no wheat; farmers are hanging on tight to stocks with Presidential elections coming in just a few weeks, and both leading candidates promising to reduce export taxes and/or quotas if elected.  

Total fuel ethanol production rose to 969,000 barrels per day last week (ending October 30th), up 25k bpd from the previous week and 40k above the comparable week last year (the previous record output for this date). Last year's production went on to peak at 992k bpd in mid-December and then again at 994k bpd in mid-June. Cumulative output rose back over the 950k bpd mark through 8 1/2 weeks of 2015/16, up a sharp 43k bpd from last year's early pace.

We look for a soft opening to the grain complex today

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