Morning Dairy Comments, 01/20/2016

Wednesday, January 20, 2016


General Market News

· After closing higher yesterday the Dow fell over 300 points overnight

· Chinese industrial output slows to 5.9% growth from 6.2% in November

· Crude oil prices continue to slide trading sub $28 a 12 year low

· Malaysian oil company Petronas to cut $11.4 billion in spending over next four years in response to low oil prices

· Shell says profits down by as much as 50% due to price decline, to cut 10,000 jobs

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Class III, Cheese & Dry Whey 

What a difference a long weekend makes as the market was riding a bullish wave up until last Friday, retracing off the early January lows and challenging technical resistance levels only to have the hammer put down in light of a soft GDT auction, which came in down 1.4% overall and 3.4% lower for cheddar, coupled with a spot call that failed to get momentum and muscle up through the $1.50 mark. By the closing bell, the board was straight red through 2016 with the large scale downdrafts and the heaviest volume trading in the nearby contracts. Damage done? Correction over? Possibly. From the fundamental front, nothing has really changed and at this juncture a recap would be redundant. Market corrections are healthy and the winning streak Class III and cheese have enjoyed over the past several sessions was likely just that—a correction. Yesterday’s performance likely opens the door to a resumption of the bearish trend with a retest of the lows potentially on the docket in short order. Drilling down a bit more, take a look at the charts below, as they are evidence of failure at aforementioned technical resistance points. The February contract hinted at such a move as we saw yesterday by clipping through its 50 day moving average (red line) back on Friday, but settling back below that marker. This opened the trade up to what we saw yesterday, in what is a very strong “hook reversal” lower and wiped out 50% of the gains from the rally that started back on January 7th. The second chart is the Class III July-December timeframe, which only made it as far north as its 20 day moving average (blue line), with similar results to what happened with the nearby February contract. We would expect to get a better feel for general market sentiment with next week’s IDFA conference, but if what we saw here yesterday has any foreshadowing quality to it, then look out below.    

February Class III~Daily

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July-December Class III~Daily

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Cooperatives Working Together (CWT) has accepted 9 requests for export assistance to sell 766,547 pounds (348 metric tons) of Cheddar, Gouda and Monterey Jack cheese, 1.543 million pounds of butter (700 metric tons), and 110,231 pounds (50 metric tons) of whole milk powder to customers in Asia and the Middle East. The product has been contracted for delivery in the period from January through July 2016.

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

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

1

$1.5000

UP ½ 

0

1

 

BARRELS

2

$1.4975

DOWN 2 ¾

0

0

NFDM

GRADE A

3

$0.7425

DOWN ¾ 

1

1

BUTTER

GRADE AA

1

$2.1325

DOWN 11 ¾  

1

1

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Class IV, Butter & NFDM

It’s a scary trade over on the Class IV side of things as futures traded sharply lower courtesy of pressure being brought to bear on both NFDM and butter, which cratered down the 10 cent limit.  The pressure on Class IV futures put the brakes on a rally that saw futures gain between 75 cents to a buck over that of Class III in recent sessions. That said and despite yesterday’s downdraft, the spread between the two remains largely intact, as Class III fell in tandem.

But the real story here has to be the butter trade, which looked poised for a ramp up to the $2.50 level but was blunted on three fronts 1) the soft GDT result, which saw butter fall 5.9% (see breakout below), 2) a spot call which shed 11 ¾ cents to open the shortened trading week, falling back to $2.1325, and 3) a “Special Executive Report” scheduled for release this coming Friday announcing that spot 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 possibly work to quell the rampant bullish sentiment in the marketplace. Today’s session will feature 20 cent expanded limits in response to yesterday’s 10 cent limit moves. Small craft advisory!

Sellers were out early on the NFDM side of things, as both SMP and WMP shed value on GDT, down 3.2% and 0.5%, respectively, and kept the pressure on as the spot price fell back to $0.7425 on solid volume. While domestic pricing has become competitive with international levels, the longer term picture should continue to be viewed through a bearish lens, as inventory levels are still burdensome and buyers are either hand-to-mouth or stocked up and while it’s hard to imagine too much additional downside, it’s just as hard to buy into any bullish arguments. That said, we’d expect a sideways to lower trade for the time being with rallies presenting selling opportunities. GDT auction results as well as overnight NZX futures settlements included below.

We expect the Class IV complex lower across the board with big losses posted on butter on very light volume.

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Grains

The grain trade started on solid footing and for the most part finished there, with both corn and beans able to find some traction off of decent export inspection tallies, but largely finding support from fund short covering action as they look to trim back on their record net short position in corn. At the end of the day, that’s the only story of significance here and believe me I’m looking for more, but it’s just not there right now. Soon enough the trade will start rumbling about acreage and all things remaining the same, corn will likely lose some acreage to that of beans come spring, with that possibility becoming stronger if the ratio between the two strengthens out from current levels of 2.28:1.

From the technical standpoint, March corn posted its 5th consecutive higher close, but in order for the winning streak to continue, it’ll have to pop through the 50 day moving average (red line) in order to possibly challenge loftier levels of resistance (purple and black lines). Similarly, March beans have now retraced to the upside and are poised to take out resistance at the 100 day moving average, but in both cases it’ll require no “turn-around-Tuesday action. No easy feat of late.

March Corn~Daily

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We look for a steady to slightly lower open across the board for the grains.


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