Morning Dairy Comments, 01/07/2016

Thursday, January 07, 2016

General Market News

· Global stocks tumbling lower after Chinese stock market trading suspended for the 2nd time this week after 7% decline

· World Bank cuts global economic growth outlook for 2016 by 0.4% to 2.9%, U.S. growth down 0.1% to 2.8%

· USDA releases 2015-2020 Dietary Guidelines

· Chipotle disclosed expectations for 4th quarter sales to have declined by 14.6% and received a federal subpoena in California relating to a norovirus incident



Class III and Cheese

Compared to the recent carnage that swept the legs out from under the market earlier in the week, Class III and cheese futures sellers tapped the brakes a bit and only drove values slightly into the red, albeit to fresh contract lows. Where to from here is anyone’s guess but it sure feels like there’s more room to explore to the downside with the potential there for this thing to plumb to depths lower than most expect. The recent move confirms that the corrective retracement into year-end was likely nothing more than the dead-cat-bounce we were looking for as traders booked profits and covered short positions before closing the books on 2015. The rejection of technical resistance levels as demonstrated on the chart below drives home the bearishness that has engulfed the trade as the market was unable to move above the 20 day moving average (blue line).

Bearing that in mind, the full weight of ramped up cheese production, benign winter weather across much of the Midwest, solid EU production, and the plethora of bearish factors that have been overshadowing the market for months on the international front. Throw in China devaluing the yuan in an attempt to kick start their slumping economy and an EU zone that continues to weather economic peril and there’s even more fuel for the bearish camp.

The latest export numbers show cheese slipping 6.8% from last month and down 14.4% year to date. Likewise, dry whey exports were off 28% from last month and are 21.6% lower year to date. So long as the USD remains supported we’d expect the export arena to continue to struggle.

The November Dairy Products report tallies came in rather neutral for cheese overall as American cheese production was down 0.3% to 377.3 million lbs. - the first decline in production since August 2014. To be clear, October’s American cheese production was initially announced down 0.7%, but was revised up 5.7 million lbs. in today’s report. That increase adjusted October production to a positive 0.8%. In fact, production of American cheese has been revised higher since August (2.0 million lbs. in August, 50,000 lbs. in September and 5.7 million in October). As expected, more milk is going into the “other cheese” category, which was up 1.2% to 604.6 million lbs. We’re making a lot of Gouda (up 139% yoy and 31.9% over October), which is interesting because a goodly portion of that product would likely go to export. Total cheese production was up 0.6%, rounding out a fairly flat report for cheese production in November. Any first-blush bullish feelings for this report likely won’t mean much. We’re calling this report neutral as production is largely flat versus last year (see breakout below).

For the week ending January 2nd, the National Dairy Products Sales Report showed the block price coming in lower, at $1.47 on increased sales volume of 11,554,015 million pounds. Likewise, barrels shed value coming in at $1.48 on steady sales volume of 8,636,161 million pounds. Dry whey found some traction and registered higher at 0.2354 on decreased sales volume of 4,442,240 million pounds.

Class III July-December Strip~Daily


We expect Class III and whey to open steady cheese lower


Spot Session Results




































Class IV, Nonfat, and Butter Futures

The Class IV market is under fire as well, with futures trading sharply lower yesterday courtesy of component weakness. Values shed between 19-45 cents with the March-June timeframe in the cross hairs of sellers.

The chronic weakness in the NFDM market extended out through 2016 as sellers continue to pound away at the futures forward curve without fear. We would expect that trend to continue in light of an eroding spot price that is looking more like it’s on the way back down to test the $0.70 level. Export numbers for NFDM was a bright spot, coming in 0.8% higher than last month and 0.5% higher year to date. Those numbers are in stark contrast to that of butterfat exports, which registered 59.1% lower month over month and down 70.7% year to date.

Taking a look at the Dairy Products Report NFDM production slowed more than normal, down 16.9% to 126.1 million lbs., for the second month in a row, but remains 5.1 million pounds above 5-year average production. Export heavy SMP production, however, rose 44.1% to the highest level since August 2014 at 44.1 million lbs. Ultimately NFDM inventories remain plentiful, though we expect the trend of lower NFDM production to continue in December and the first part of 2016.

Speaking of butter, the market feels a bit top heavy here and further weakness in the futures market is likely to materialize with support expected to come in around the $2.00 mark. If real pressure is brought to bear on the spot price, a downdraft into the $1.90’s is not out of the question, however hedgers will likely construe those levels as value and lock in. 

Capping off 4 months of butter production gains, November was the strongest production month on record for 2015 according to the yesterday’s Dairy Products Report. Butter production grew by 4.4% to 150.8 million pounds, 7.6 million pounds above the five-year average. The soaring price of butter likely drove some production decisions, but yogurt also may be partially to blame as production of that product rose by 7% in November. Sour cream production also increased by a respectable 2.1%. Butter production is on the mend, but we wouldn’t call this report very bearish for butter since the price is already 86 cents off November’s high price.

For the week ending January 2nd, the National Dairy Products Sales Report showed butter slipping to 2.04 on slightly lower sales volume of 3,595,507 million pounds while NFDM also came in higher at 0.7879 on increased sales volume of 14,692,331 million pounds.

We expect the Class IV complex to open lower.



The short covering rally in grain markets continues as funds look to trim back on positions ahead of the January 12th USDA report. That said, the markets are in need of a story as Brazilian weather fears have been quelled by recent rains, leaving short fund positions the only material support out there, and the only real story as well. The charts look bearish overall, but there was a hint of support and a possible move to the upside in the December 2016 corn contract. The trade is consolidating near its lows but did manage to close well off those marks in yesterday’s session after testing $3.75. Possible upside targets would be the 10 and 20 day moving averages at 3.83 ½ and 3.89 ½, yellow and blue lines, respectively.  Posted below are estimates for the USDA report, please note we’ve added “INTL FCStone Estimates” to our tables starting this month – these are estimates from our Chief Economist Arlan Suderman, who is one of the analysts polled in the Reuters surveys.

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

December 2016 Corn~Daily




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