Morning Dairy Comments, 01/06/2016

Wednesday, January 06, 2016

General Market News

· Global stocks deep in the red on China economic concerns as the yuan has reached its lowest level since September 2010

· NZ Dollar falls as GDT auction results boost odds of NZ interest rate cut

· Brent crude has fallen to a fresh 11-year low

· ECB’s Praet says Bank has no ‘plan B’ for stimulus



Class III and Cheese

The downward momentum continues in class III and cheese futures, in what could best be described as a “post-holiday hangover” on rather heavy volume.  Fresh spot cheese selling, reduced worry over milk supplies in NM and TX and a lackluster GDT event all had a hand in paving the way lower Tuesday. But we’re coming up on recent price lows – and in some cases made new lows – in what has been a sloppy re-test of December low price prints.

The big news lately has been the storms that battered open lot dairies in New Mexico and Texas last week.  While this will have reverberating impacts on milk supply and while it poses some logistical challenges, cheese production seems to be humming right along. So that story has, for the time-being, turned out to be a “buy the rumor, sell the fact” scenario for class III and cheese futures. 

Market participants have taken a shoot-first, ask questions later stance and pushed prices lower removing any year-end, southwest US storm premium that was in the market over the past two days.  The onus is now on spot cheese to move lower and quickly to keep the same type of selling pressure and price declines we saw on futures today.  If not, futures will likely bounce.  While we can’t rule out additional selling interest for the spot market, we perceive the spot prices around current levels to be in relative balance for now.

The “blob” – that a huge and dynamic pool of extraordinarily warm surface water that’s been sitting south of Alaska and making people doubt the potential impacts of El Nino over the past year – is turning out to be no match for this brash El Nino heavyweight.  Los Angeles County absorbed 1.5 inches of rain in the last 24 hours and more is expected thru Saturday in what has been described as a “conveyor belt of storms to hit California”. Rain is also expected to fall north of LA in the central valley.
So far less than ½ an inch of rain has fallen in Tulare County, but more rain is expected in an on again, off again pattern thru next week.  And the storms have already translated into big snow for the Sierra Nevada Mountains with about 10 feet of snow measured in the upper elevations. While this is excellent news for the long-term view, we’re keeping a close eye on how this weather may impact production in the short-term. 

Dry whey futures finished mixed yesterday with the lion’s share of weakness coming in the second half 2016.  The January to December average is hovering around 25.00 cents settling yesterday at 25.70.  Trading volumes are on the mend after the holiday with 338 contracts changing hands yesterday. We think there could be modest weakness from current levels although our pricing is looking more attractive on the world stage.

The USDA will release November’s Dairy Products report this afternoon.  Milk production in November was up 06% yoy and we expect that to translate into growth in all areas of cheese production, but mostly in the “other cheese” category.  We expect the following:

· American cheese output to be up 0.6% from last year at 380.9 million pounds and 2.1% higher than the previous month.

· Other cheese, on a year-over-year basis is forecast to rise 2.2% to 604.6 million pounds. On a month-to-month basis, other cheese will likely increase 3.2%.

· Total cheese production is forecast at 985.5 million pounds, 1.6% above 2014 levels and 2.8% above the previous month.

Last year, American cheese output was up 6.3%, other cheese increased 4.5%, and total cheese gained 5.2%.

Cull rates from mid-November to mid-December have been mostly higher. So far in 2015, weekly slaughter rates are running 3.7% above the same period a year ago.

We expect Class III, cheese and dry whey to open lower

Spot Session Results











DN 2 ¼







DN 4







DN 1 ¼












GDT Results


Class IV, Nonfat, and Butter Futures

Butter prices saw a significant move lower yesterday with nearby contracts shedding nearly 3 cents.  Deferred months also moved lower with June the biggest loser, closing down 3.475 cents on the day despite the 6.7% price increase tallied during the GDT auction. We expect follow-thru selling this morning. 

NFDM also saw significant declines with nearby February losing nearly 3.25 cents as some expectations for a better performance by the powders in the GDT auction failed to materialize.  Buyers continue to sit on the sidelines buying in “hand to mouth” as necessary.  Overall, the market seems to be in balance in the mid-70 cent range for now.  CWAP was reported up 1.7% to $0.7872 on over 7 million lbs. yesterday.

As for today’s Dairy Products report, we expect:

· November butter production is forecast to hit 146.6 million pounds, up 1.5% from 2014 and 2.7% higher than the previous month. In November 2014, butter production increased 1.6% versus 2013 levels.

· Nonfat dry milk production is forecast to reach 136.9 million pounds, 9.7% less than a year ago but 19.2% above the previous month. November 2014’s nonfat dry milk production was 49.9% stronger than in 2013.

NFDM to open lower Butter and Class IV steady.


Both corn and beans saw slight increases.   Corn settled up anywhere from 1-3 cents while beans saw increases of 4-6 cents.  Some Chinese buying helped support corn markets while some short covering is likely behind the soybean rally.  A stronger dollar did not help matters with strength not boding well for grain prices.

The big story for grains today will likely stem from currency markets. China devalued again overnight driving the macro market – ruble making a new low for the move this morning and crude/equity markets are getting smashed.

El Nino is buzzing in grain discussions this morning.  We thought it was interesting that roughly 40% of El Nino events are followed by a La Nina, according to our weather service. And it is these La Nina events that often wreak havoc on grain markets, bringing heat and dry conditions to much of the Corn Belt. While discussion of La Nina may be a bit premature, it is important to realize that these types of events do occur and do so relatively frequently. With grain prices historically low the pinch from a margin perspective has been lessened to a degree.  However, that pinch may feel more like a punch if grains skyrocket due to some adverse weather later this year.

We look for a steady to higher opening in the grain complex today. 


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