Morning Dairy Comments, 01/28/2016

Thursday, January 28, 2016

General Market News

· Standard Chartered sees Brent at $70-$75 by year end

· Fed signals diminished appetite for rate hikes but leaves them on the table

· Eurozone confidence indicators cooled on market turmoil

· U.K. GDP up 0.5%

· Japan’s economy minister resigns on accusations he took bribes



A Dairy Fast-Break   

Often times this is the time of year in the dairy industry when directions are set. So it’s justifiable to ponder whether yesterday’s rally monkey mode was a short term bounce or something larger. We tend to believe in the moment that buyers are not getting complacent and are rather happy with current price opportunities. Thus they are nibbling away, trying not to rock the boat. The problem is that with the boat so heavily weighted to one side it’s far too easy to tip over.

Short term moves can really spike before correcting in line with underlying S&D tables. Yes we have ample milk production in the U.S., EU, China, Australia and the NZ milk production number for their season should come in far better than the scariest of expectations set months ago (which we scoffed at from the start). Yes the global economies are soft and demand in the short term might be as well. Yes we spent much of last year rebuilding stocks in end user and other private hands. But this is all old news and fresh news drives markets. There seems to be a lack of fresh bearish news in the moment other than EU aggressive forward selling and this week buyers as far as we could tell were nibbling.

Contrary to common belief butter is available for sale but cream is still tight. Ahead of an early Easter, late Passover and late Ramadan look for us to remain firm in Easter demand with a tempered pullback afterward.

Should Nonfat/SMP rally- No! but again the boat is heavy and profits on long held shorts in a market that has plummeted must be taken and yesterday saw some of that chasing going on. Someone told me the other day that a 20% move in butter prices upward of late wasn’t’ a big deal. I scoffed suggesting 20% was a big move in anything, but he calmly out into the correct perspective; the market has grown accustomed to much bigger moves. So could NFDM/SMP rally despite the aggression of EU overseas sales and growing stocks at home- in the short term, yes.

A bounce could be good for the market overall, providing producers an opportunity to sell the back half over breakeven, allowing buyers an early opportunity to lock in well within budget numbers as well.

Given the length of time it takes to reduce milk production we believe this year will likely be a long grind lower in narrowing range, but filled with short veering rallies.

For the week ending January 23rd, the National Dairy Products Sales Report showed the block price gaining to $1.49 on increased sales volume of 13,321,963 million pounds. The barrel price also moved higher to 1.56 on decreased sales volume of 10,403,831 million pounds. Dry whey held steady at 0.2352 on lower sales volume of 6,896,757 million pounds.

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

Spot Session Results

























UP 1 ¼







UP 1  




Class IV, Butter & NFDM

Slingshot action to the upside in NFDM, accompanied by continued strength out of butter and viola, Class IV futures rocket limit up and once again hold a commanding premium to that of Class III. These markets are adult swim only and you’d better be pretty good at that in order to stay afloat, because we haven’t seen the last of the volatility we’ve all come to know and respect.

Breaking it down, the explosive action in NFDM futures was likely the function of brisk volume being brought to the spot market in recent sessions without pressuring prices below the $0.70 line, despite EU product in the 65-68 cent range. Yesterday’s uptick to $0.7175 was enough to spook some shorts into covering, propelling futures sharply higher on solid volume. Many contracts were able to muscle through initial resistance levels but either had, or are likely to encounter difficulty getting through the next levels, such as the 20 and 50 day moving averages, as they have not been successfully powered through for months. That said, we’d be remiss not to remind folks that this market has been drilled down upon for some time, with pretty decent destruction of the forward curve, so there is the possibility that a retracement will have some legs. Long term (multi month) though, we still have to question the sustainability of such a move until a convincing change in the current landscape presents itself.

Adding to Class IV strength was another push higher in the butter market, as it continues to churn. Fear and greed. Greed and fear. Which one is driving this thing? Answer is probably both. If you’ve got product you’re not selling it here with some comfort of a forward premium allowing people to put in the freezer and lock in higher prices in the future, and if you’re short it, you stepping in on weakness to secure it. What’s so perplexing is that price action isn’t in real alignment with fundamentals, and that’s what got a lot of people nervous which reflected in yesterday’s trade as futures pushed sharply higher across the board.

For the week ending January 23rd, the National Dairy Products Sales Report reflected a sharply higher butter price of 2.11 on steady sales volume of 4,842,308 million pounds, while NFDM registered lower, at 0.7689 on increased sales volume of 13,998,323 million pounds.

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


If you didn’t have that forth cup of coffee yesterday, getting through to the close of trade was likely a difficult task, as corn finished sharply unchanged, while beans and wheat diverged, closing up 6 ½ cents and down more than 8 cents, respectively. Fund managers remain content to be short the corn market and though an acreage battle looms in the coming weeks, there was nothing there to spark any kind of short covering action in yesterday’s trade.

On the wheat side, we were a bit skeptical of the recent move and yesterday’s pullback came as little surprise. The recent support can be attributed to Russia entertaining the possibility of limiting exports amidst dryness issues in India, which would make the world stage a bit more interesting. That said, there’s plenty of product out there and in a complete 180 degree about face, Russia is now considering lowering the export tax on its wheat, adding to the global supply glut and hence pressuring the market here in Chicago lower. Funny how things go.

In any event, the trade will take a look at export sales numbers this morning and go from there, however with the Fed standing down on interest rate hikes, USD strength should persist and limit export capabilities in the process. For the time being, direction in the crude oil market will remain the predominant influence on the commodity space, grains included.   

We look for a soft opening in the grain complex today. 


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