Morning Dairy Comments, 12/11/2015

Friday, December 11, 2015


General Market News

· Global dairy production projected to grow at 2.4% annual rate until 2025 according to European Commission http://goo.gl/hbd4hZ

· Fonterra holds milk price forecast steady at $4.60/kgMS, http://goo.gl/JQDjox

· Barring Senate action, COOL retaliation could begin Dec. 18th

· Glencore mulling ag business IPO http://goo.gl/v9xcdM

· Consumer Prices in Germany rose 0.1% in November while inflation is up just 0.3% year to date.

 

 

Class III, Cheese, and Whey

It didn’t take much, but yesterday marked a new 2015 low for spot block cheese prices. Block cheese closed down just ¾ of a penny (on 7 trades) to $1.4675 yesterday, breaching the previous low of $1.4700 established on January 14 and expands the 2015 block cheese trading range to 33.25 cents ($1.80 was the high) versus a massive 95.50 cents in 2014. On the surface, new pricing lows tend to beget new lows.  However it’s worth pointing out that the higher $1.40 price area has marked a bottom level of block cheese pricing for the past 4 years (since January 2011).  Furthermore, given the time of year it would not be unreasonable to see continued choppy trading ranges for spot cheese as opposed to a sudden collapse to close out the year.

Overall, however, the current market sentiment continues to be fairly negative towards cheese pricing. Mild Midwest weather and palatable margins through the fall have continued to foster plenty of milk in major cheese producing regions. Couple this with the overhang of cheese inventory and the direction lower appears firmly in place. 

Futures, however, are oversold right now. Many times futures markets look “cheap” on the way down while continuing to move lower exceeding even the most negative of expectations. But from a technical standpoint, don’t rule out a futures bounce in the coming days.  When everyone is lined up on one side of the market as things appear to be today, unruly bear bounces can occur.  For now, we’re looking for a mixed to lower opening on class III and cheese markets and a continuation of the recent trend.   

Dry whey prices finished mixed yesterday on 124 contracts of trading volume. With all the recent trading activity for 2016 the net result is a price average that continues to hang in around 30 cents for the calendar strip.  We continue to believe prices will hold in around that level on average for the balance of the year.  The Central Mostly Dry Whey powder price was steady with the previous week at 21.13 cents, while the Western Mostly price was unchanged at 23.75 cents.

Australia faces the continuing impact of El Nino as rainfall in the month of November was sparse, ranging from below average to very much below average in many of its dairy regions.   Rainfall deficiencies and drought conditions increased in most areas except in the Northwest while long term weather forecasts call for warmer than average temperatures over the next three months.  Dairymen have being culling cows at a heightened rate as the month of November saw an increase of 28% while the average price received per kilo for cull cows was 57% higher year over year.  Year to date the cull rate has increased by 44% compared to the same period last year.

For the week ending November 28, dairy cow slaughter under federal inspection was down 3.9%, at 44,300 head, compared with the same period the previous year. Year-to-date slaughter levels are 3.98% higher than 2014 levels, with 2,685,500 head slaughtered.

We look for a mixed opening for Class III, Cheese and Dry Whey.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

7

$1.4675

DOWN ¾   

0

1

 

BARRELS

5

$1.4875

DOWN 1 ¼ 

0

0

NFDM

GRADE A

0

$0.7575

UP ½ 

1

0

BUTTER

GRADE AA

0

$2.3000

DOWN 49

0

1

 

Class IV, Nonfat, and Butter Futures

The much anticipated drop in butter has occurred.  When a market gets going like this it is hard to know when it will stop. There is still good underpinning demand and current levels will look attractive to some buyers still.  Cream demand is still expected to be strong going into the New Year.  And with production issues in California, we’d expect generally good demand for butterfat to put a floor on butter pricing north of the $2.00 mark for the foreseeable future. 
The 49 cent decline posted during the spot session promptly ignited a flurry of selling activity in the nearby futures contracts as market participants scrambled to shore up positions amidst the rout of the spot butter.  The January contract bore the brunt of the bearish price action, falling 9.500 cents lower, settling below $2.00 for the first time since November 17th.  The remaining butter futures contracts finished the day between 0.500 and 3.500 cents lower as nearly 300 futures contracts traded on the day.  The December butter futures contract sits now at a 35 cent premium to the spot price while the latest NDPSR butter price announced Wednesday carried a premium of just over 58 cents. 

NFDM futures garnered support for the near dated futures contracts from the 0.500 cent increase posted during the spot session as the January through April contracts tallied gains ranging from 0.675 cents to 1.700.   The bearish fundamentals of the powder market will continue to guide future price action, though the announcement by Fonterra that the volume of WMP to be offered on the GDT auction over the next four events is to be cut by 13% may provide a respite from downward trend in prices, however fleeting it may be.

Class IV futures closed out yesterday’s trading session with contracts settling between unchanged and 25 cents lower as the nearby contracts tumbled lower on the surprising magnitude of the spot butter price decline. 

We expect NFDM, Butter and Class IV to open mixed

NZX Futures

While U.S. markets falter, prices on the NZX were stable to higher yesterday. WMP prices gained 0.5% to 2.9% during December 11ths trade.  January SMP was up 4.6%.  Expect additional strength heading into next week’s GDT event.

Grains

Grains markets all moved higher yesterday as funds looked to lighten their short positions.  The corn market saw funds buy back an estimated 8,000 contracts spurred on by the stronger than expected weekly export sales figures.  Despite the strong showing for the week, export sales are currently running 23% behind last year’s pace while Brazilian corn is still price 10-15 cents/bushel under U.S. values.  The March corn contract gained 5.25 cents on the day to settle at 379.25 while the May contract added 5.00 cents to close out at 384.25.  Soybeans also saw supportive results in the weekly export figures yet total exports are still 6 MMT behind last year.  Both the January and March soybean contracts gained 1.50 cents on the day to settle at 878.25 and 881.25 respectively. 
The stronger U.S. Dollar continues to inhibit demand as the weaker Brazilian Real and the prospects of a swift further devaluation of the Argentinian Peso will continue to dampen export prospects.  In the wheat market funds were estimated to have bought back 3,000 contracts despite disappointing export sales figures.  Currently U.S. wheat is price $28/ton above that from the Black Seas.  The March wheat contract gained 5.75 cents to settle at 495.50 as the May contract increased in value by 5.50 cents to end the day at 501.00. 

The CPC/NOAA updated their El Nino outlook, expecting El Nino to move to a neutral status in the late spring/early summer decreasing the odds of severe drought in 2016. 

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We look for a slightly higher opening in the grain complex.

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