Morning Dairy Comments, 01/11/2016

Monday, January 11, 2016

General Market News

· Chinese stocks tumble again as Beijing remained on the sidelines

· World food prices record 4th consecutive year of decline in 2015

· Crude oil seen heading to $20 by Morgan Stanley

· China retreating from U.S. bonds



Class III and Cheese

Class III futures surged higher in the January through July contracts, adding between 6 and 32 cents, and tightness in Barrel availability led to a 4.5 cent gain in during the spot session.  The nearby Class III contracts responded in kind as the January through April months accounted for 77.5% of the total Class III trading volume as traders looked to adjust positions to fall in line with the spot equivalent Class III price, now sitting at $13.64.  Open interest increased by 300 contracts during the positive price action as value buyers took advantage of the recent price declines to layer in positions.

We haven’t heard much around a material tightness in barrel cheese, but that doesn’t mean Friday’s bump was unwarranted.  We mentioned a week ago that, for the time-being, the cheese price seems to be relatively stable.  If the price of block cheese rises, we could see more strength on nearby futures prices today. Overall, however, we expect that loads of fresh cheese are rather widely available today and that the price of cheese will hold in here around $1.50 in the near-term. 
The IDFA (International Dairy Foods Association) annual meeting will be taking place in Scottsdale, Arizona in two weeks. At the tail end of last year’s meeting, the markets rallied sharply on news of drought in New Zealand and the estimated declines in milk production there. Will that happen again? Will we be surprised by something else?  Or will this year’s hallway conversations revolve around how much cheese is in the U.S. today?  We think the latter. But keep in mind markets bottom on the most bearish of news. 

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

Spot Session Results


















UP 4 ½














UP ¼





Class IV, Nonfat, and Butter Futures

The Class IV market remained mostly steady on Friday as strength in the butter market was offset by the weakness in the NFDM.  Butter futures settled between 0.700 and 1.525 cents higher in the January through August contracts after the spot session generated a 0.25 cent increase in the spot price to $2.0350.  The September through December contracts tallied gains ranging from between 0.025 and 0.250 cents as hedging interests focused on the nearby contracts while flattening the forward curve.  The continual supportive demand in the domestic market along with the increases in the recent GDT auctions have shielded butter prices from much of the collapse experienced in the other dairy products.  Butter contracts should continue to find supportive hedging action to begin the week as buy side interests continue to layer in protection.   

The NFDM closed out last week with contracts settling between unchanged and 1.475 cents lower, with the heavier losses posted within the August through November contracts as market participants looked to sell into the forward curve and capitalize on the $1.00 plus price levels of the deferred months.  The global glut of powder supplies will continue to weigh on prices, thwarting any significant price recovery for the months to come.  Deferred contracts should continue to absorb the greater selling pressures to start the week.

We expect the Class IV complex to open mixed with butter steady to higher and NFDM lower.



The grain markets settled higher Friday led higher by the wheat markets as drought concerns out of India inspired a measure of short covering.  Speculation surrounding the damage to the wheat crop spurred the rally in domestic prices as the areas worst affected by the drought, circled in the graph below, are responsible for 25% of India’s total wheat production.  With 17 mmt of carryin from last year India would most likely be an importer of wheat late this year.  The March wheat contract closed out last week 10 cents higher to 478.50 while the May contract added 10.50 cents to close out at 483.75.    


Corn futures moved higher, settling 4.00 and 4.50 cents higher in the March and May contracts, as 100 plus degree temperatures in South America are thought to have impacted crop development.  Funds were credited with buying 9,000 plus contracts as index fund rebalancing began Friday, adding to the price support.  The Argentina corn crop is estimated to have reached 82% planted Friday as favorable weather crosses South America, yet producers there are still hesitant to sell while freight values have fallen low enough to make Argentinian corn more favorable pricewise compared to that out of the U.S. 

Earlier session strength in the soybean market abated throughout the day to result in minimal gains in the March and July contracts, gaining 0.75 and 1.00 cents respectively.  China was credited with booking soybeans out of South America last week for April and forward slots as U.S. sourced beans are still overpriced in comparison.

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 lower opening in the grain complex today. 




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