Morning Dairy Comments, 01/19/2016

Tuesday, January 19, 2016

General Market News

· OPEC calls for oil market to rebalance in 2016

· China PBOC to inject $91 billion  into financial market to meet liquidity demands

· Open Country Dairy, NZ’s 2nd largest dairy processor, cuts milk payout below Fonterra’s forecast

· Bird flu returns to U.S. after confirmed case in Indiana turkey farm

· GDT auction event today



Class III, Cheese & Dry Whey 

Class III and cheese futures culminated a week of trending higher Friday with another push to the upside amid a rather quiet and uneventful spot cheese call. It wasn’t spot cheese but rather butter that had its hooks in the class III and cheese trade Friday.  Butter futures took center stage pushing 11 to 20 cents higher throughout all of 2016 in what looked to be a highly emotional capitulation of sorts.  After weeks of picking away at light offers, buyers gave up the ghost on butter last week buying offers up aggressively day after day.  Trading limits expanded, wits frayed, the butter market was the stimulating factor for class III and cheese Friday. 

So class III and cheese futures are in the midst of a corrective move to the upside.  The question then becomes, is there a good reason for the class III and cheese futures upside to continue this week?  We don’t see a lot of upside potential to spot cheese right now, so unless butter continues on this extreme path to the upside – we don’t see a lot of additional upside for class III and cheese futures this week.  Likely the markets will be choppier and, in some cases, lower as we hear of cheese supplies in the country being ample with some instances of cheese order cancellations going on.

Dry whey futures finished last week mixed and on lighter volume.  Buyers see value at or around current levels, but the fundamentals of the U.S. dry whey market continue to weigh on prices.  We expect the market to remain rather stable around current levels to begin this week, but have noticed a shift in both volume and open interest over the past several months.  Spikes in volume and growing open interest amid rather stable prices over the past few weeks (Jan-Dec pack is hanging in around 25 cents), tells us that something may be brewing for dry whey and both buyers and sellers are putting on positions.


We expect Class III and cheese to open lower, whey steady to modestly higher

Spot Session Results


















UP ½ 







UP ¾







UP 9 ¾ 





Class IV, Butter & NFDM

The Class IV futures spiked higher Friday thanks to the significant surge in butter prices, leading to gains ranging from 27 to 75 cents in the February through December contracts.  A total of nearly 250 contracts changed hands as trading activity was distributed throughout the March through December months as market participants looked to coverage against a potential continuation in the butter market rally. 

The prolific gains of the butter market tallied during Friday’s trading session has many scratching their heads as to what catalyst spurred the buy side frenzy to secure product and coverage.  The February through December contracts jumped between 11.350 and 20.000 cents higher to end the week as nearly 400 futures contracts traded.  Butter holdings reported within the weekly cold storage for selected storage centers report for the week ending January 11th had estimated to have increased by 24.1% from the week prior to 9.648 million pounds, 133.9% higher than during the same week last year.  Yet butter prices have soared while the other dairy markets all languish at price levels at or near their lowest points of the past five years.  The butter market seems to be driven at this point by a combination of hedging interests and short covering that has exasperated the magnitude of the recent price move.  While sub-$2.00 butter seems out of the question in the coming months at this point the recent price action is unsustainable with any follow through buy side price action today should result in more modest gains.       


*****The CME will be releasing a “Special Executive Report this coming Friday announcing that the butter traded on the CME will no longer have to be graded AA beginning February 1st.  The removal of the grading requirements has the potential to impact the quantities of product brought to the exchange and help to quell the rampant bullish sentiment in the marketplace.  The CME will be adding call option strikes up to $2.80 for the butter contract months of July through December 2016 which should be available today.

The NFDM finished last week with mixed pricing by settlement, with contracts settling between 1.200 cents lower and 0.375 higher despite the 0.750 cent gain posted during the spot session as just over 100 contracts traded.  The NFDM market remains bearish while the more significant selling pressures should continue to materialize in those deferred contracts holding the stark premium compared to the nearby months. 

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



The grain markets closed out last week’s trade with divergent price action as the corn and wheat pushed higher while the soybeans tallied declines in price.  The corn market received a bullish injection of news as the Ag Minister of South Africa announced the need to import as much as 5-6 mmt of corn in the coming year due to the severe drought, over three times the previously projected import totals (highlighted in the below chart). 


Corn basis is firming as U.S. producers are reluctant to sell at current price levels while funds were credited with buying at least 9,000 contracts to reduce their overall short position. 

The soybean market pushed lower as beneficial South American weather patterns were forecast to bring rains to the dry areas of Argentina and Brazil over the long weekend as funds were estimated to have sold 3,000 contracts.  The NOPA crush report revealed a year over year decline of 8 mln bushels to 1,577 mln as crushers margins are declining.  Bean oil usage in December reached a record high of 1,830 mln lbs. as export sales and shipments have increased by 20% year over year with foreign demand has been stronger than originally anticipated.

The wheat complex garnered strength from weather concerns in the FSU region as previous moderate conditions have given way to frigid temperatures which will stress some of South Russia’s less covered winter wheat areas.  The Russian currency continues to depreciate against the U.S. Dollar making their crop more attractive pricewise to U.S. sourced wheat.  Funds were credited with having bought 3,000 contracts. 

We look for a higher open in the grain complex, corn up 3-6 cents, soybeans up 4-7 cents and what up 3-6 cents. 

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