Morning Dairy Comments, 01/29/2016

Friday, January 29, 2016


General Market News

· NZ banks to get tougher on dairy farmers after milk price forecasts fall http://goo.gl/evWNuY

· Bank of Japan cuts key interest rate into negative territory http://goo.gl/ViVC4V

· Argentina to increase beef exports to EU once FMD-linked ban is lifted later this year http://goo.gl/MnKkdV

· Eurozone inflation rises 0.4% year-over-year, meeting expectations

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Class III / Cheese   

Weakness prevailed in yesterday’s session as markets continue to oscillate, in a rather narrow range, over the last few sessions.  While the sideways momentum is likely temporary, it seems that participants are standing aside, at least during yesterday’s session, if volume is any indicator.

With little new fundamental news on the horizon, from a data perspective, we may find ourselves range-bound in the near term looking to the spot session to dictate direction.  As we have mentioned over the course of the last few days, the tone of the market is bearish with the vast majority of participants huddled on this side of the boat. The tug-of-war between bulls and bears will likely be seen as commercial buyers employ a bit of dollar-cost averaging strategy in a weaker market.

That said, we struggle to find supporting arguments that overwhelmingly support the bulls out there. Weather, eh, perhaps.  Obviously, prolonged heat events could factor into production hiccups in the summer months, but June is still fairly far off.  Demand from emerging markets is highly unlikely as well, at least through the end of 2016. Those markets, once regarded as perpetual / potential buyers of the western world’s dairy products, are now less of a factor than they have been in the past, at least in regards to the last 5 years.  Conventional wisdom of the past few years has suggested that if the western world had excess dairy product, China would take it.  For the most part, that has rung true.  Hiccups with local production, tainted infant formula and a changing diet, in conjunction with more purchasing power, have made China an aggressive buyer, or at least it has been up until this point.   But, what has changed?  Chinese milk production in January through November 2015, looks to be a healthy 5.2% above 2014.  While healthy, production has increased significantly since 2009, from 14.830 to 22.699 (‘000 tons).  What does this mean? China has vastly improved its domestic production capabilities.  One could expect that trend to continue.  In fact, China has made coordinated development of the rural sector a prominent point in regards to the 13th Five-Year Plan for development.  Development being self-sufficiency in regards to domestic food production.  Regardless, one should not count China as down and out in regards to imports.  While it is true that WMP and SMP imports decreased significantly over the year prior both cheese and whey imports saw slight increases.

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

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

0

$1.4600

UNCH  

0

0

 

BARRELS

0

$1.4300

UNCH  

0

0

NFDM

GRADE A

4

$0.7200

UP  ¼

1

0

BUTTER

GRADE AA

0

$2.2000

UNCH  

0

0

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Class IV, Butter & NFDM

What a difference a day makes, especially when it comes to NFDM.  Values plummeted as much as 4 cents through November, giving back nearly most of the gains seen the day prior.  Ultimately we believe NFDM is near its bottom.  However, should we break through recent lows in the nearby contracts look for support near 70 cents.   Some may balk at that number, but as NFDM has proven time and time again that new lows are possible.  Even though prices are attractive buyers have been leery to step in especially in this downward trend.

On the international front, butter offered into private storage slipped last week, totally 2,611 tonnes, bringing the total offered since January to 9,901 tonnes.   Since September 2014 172,824 tonnes have been offered into storage. Domestic prices fell as much as 7 cents lower in April. Regardless, the April contract, the biggest loser on the day still remains above $2.200.  April butter has not seen a trade below two dollars since mid-December and we expect butter to remain above $2.0000 for the time being.

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

Grains

Grains saw red across the board yesterday with nearby March corn down 4 cents and beans down 15 ¼ cents.  The move in beans came as U.S. export sales to China were cancelled.  This move occurring as news out of South America regarding some dryness causing losses in corn in some portions of the country. This drop now has beans at a 3 week low.  The dollar has not helped the situation either.  Regardless, March corn has traded within a 40 cent range since the beginning of November with early October being the last time it was over $4.00. While beans were only down slightly this move could be attributed to the slide in corn and wheat futures.

We look for a mixed opening in the grain complex today, corn and soybeans slightly higher, wheat lower. 

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