Morning Dairy Comments, 12/09/2015

Wednesday, December 09, 2015


General Market News

· China slashed yuan reference rate to its lowest level since August 2011 while its CPI rose 1.5% in November

· McDonald’s All-Day Breakfast Attracts More Customers: Study http://goo.gl/PjQOwf

· Brent Crude Falls; Oil Prices End at Nearly Severn-Year Lows http://goo.gl/dnZHKE

· VW says now only 36,000 cars affected by CO2 cheat down from original 800,000 vehicle estimate

· World Bank: Emerging markets at crossroads http://goo.gl/xicim5

 

 

Class III, Cheese, and Whey

Class III and cheese futures shrugged off a higher spot call that saw blocks and barrels pull to parity with each other, but when the dust settled it mattered not. The trade is primarily focused on the bearish fundamentals at hand placing periodic spot strength on the pay no mind list. Price action continues to wear out the path and range that has become so familiar of late. Barrels continue to find support in the mid $1.40 range in what feels to be more defensive in nature, which is likely one reason futures continue to leak lower on a daily basis as the market anticipates an eventual surrender by buyers on the horizon. Of course, we don’t know if that will come to fruition – but that’s what the trade would suggest lately. 
Price action overnight for both class III and cheese was lower, primarily in the Q1 contracts.  January class III, for example, printed $14.00 under the cover of darkness last night.  January cheese printed $1.5390.  Good early volumes suggest this is not a one-sided trade.  But we look for price action to continue to consolidate in a congestive, sideways to lower pattern on scaled back volume and compressed intraday ranges so long as spot cheese dances around the $1.50 mark. That dynamic is unfolding as we speak as demonstrated by the chart below with as prices drift and continuously fail at initial resistance levels near the 10 day moving average (yellow line). The next obstacle to recovery rests at the 20 day moving average (blue line) which comes in at 15.25 and will likely prove formidable if challenged.

January-June Class III~Daily

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We look for Class III and Cheese to open steady to lower with Dry Whey opening mixed.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

2

$1.500

UP ½    

0

1

 

BARRELS

7

$1.500

UP3  

0

0

NFDM

GRADE A

8

$0.7500

DOWN 3

1

1

BUTTER

GRADE AA

0

$2.8400

DOWN 6  

1

1

clip_image007

Class IV, Nonfat, and Butter Futures

The culmination of component weakness drove Class IV futures to double digit losses yesterday through the August timeframe as both butter and NFDM were drilled in the red. Recent incremental downticks in the spot market finally gave way to the downdraft that presented yesterday which caused a meltdown in nearby futures. Contracts through Q1 took the brunt of the heat, with limit down prints marking the board on solid volume as the trade ran for cover.
Is this the beginning or just corrective in nature? Conventional wisdom would suggest there’s more pressure to come and lower prices in the offing.  It’s tough to know where a market will stop once it gets going in a direction, but given discussions around the industry we don’t see that a material shift in the supply/demand for Grade AA salted has yet occurred.  We think short-term support will come in around $2.60 or higher.  Despite the sharp pullback on futures yesterday, bear in mind that no technical damage was incurred which could put the brakes on slippage in short order if the market holds at support levels,

NFDM futures are under chronic pressure as the spot price retreats back to the mid $0.70’s and in many cases futures plumb the depths to fresh contracts lows. Overnight prices were lower again on the heels of another decline in CWAP, which fell 2.8% to $0.7488 on 6,446,214 million pounds.  It’s an understatement to say the market is bearish but the fact is that supply continues to outstrip demand and despite the surge in exports, we will need to see a string of successive months in order to turn this ship around and reverse trend.

NZX Products

NZX dairy products were largely unchanged during a quiet trade.  February and March WMP contracts ticked up slightly, but otherwise markets were flat. 

We expect NFDM to open lower in line with the overnight weakness, Butter and Class IV to open mixed.

Grains

Grain markets are in need of a story. The basing attempts to stage rallies off of have been blunted of late as the trade preps for today’s USDA supply and demand numbers, which are largely anticipated to come and go with little splash 9see estimates below). It will be difficult for the market to sustain any kind of upside momentum without fodder to feed the bull and downside pressure has proven to be a bit unattractive as prices have fallen to levels of value.
What we have here not necessarily “a failure to communicate” but more so a sector of the commodity space that has found relative equilibrium. If today’s report is a dud, then it’s likely time to shut the book for the balance of the year and revisit this trade in January, when the acreage battlefront will begin to come to the forefront. Outside of that, the trade will be monitoring conditions in South America, USD and export tallies as well as El Nino developments. Outside of that, rallies will likely be selling opportunities until further notice.
A chief transportation executive in South Africa told Reuters yesterday that the country was preparing to import as much as 4 million tonnes of corn in 2016, due to continued drought; they had perennially been a net exporter of corn, averaging around 2 MMT of net exports in the five years prior to last season, when they imported and exported 600k tonnes each (per the USDA).

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We look for Corn, Soybeans and Wheat to all open slightly higher this morning.


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