Morning Dairy Comments, 02/02/2016

Tuesday, February 02, 2016


General Market News

· ***GDT auction this morning***

· Crude oil dips sharply, falling $2.00 yesterday

· Surprisingly Ted Cruz wins the Iowa caucus over Trump and Rubio

· Clinton and Sanders in virtual tie in Iowa

· Alphabet Inc. (Google) saw its price move higher yesterday after a glimpse at its new ‘moonshots’ business excited investors and it surpasses Apple as the world’s most valuable company in terms of market capitalization

· Chinese equities were higher overnight following another cash infusion but elsewhere equities are lower this morning

· CWT assists with 597,000 pounds of cheese and WMP exports

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Class III and Cheese

What is more plausible, Donald Trump winning Iowa and running away with the Republican nomination or the remainder of the Class III Q1 contracts making a 45 cent rally? When you think about it, both have similarities. No matter how much bad news is thrown at the Donald, his poll numbers continue to rise. Like Trump, the Feb and March Class III contracts continue to rise in the face of mostly bearish news. Since the beginning of January those two contracts have rallied 47 cents/cwt on average. The other 2016 contracts during the same time are down 13 cents/cwt on average. It doesn’t stop there. They both have momentum. Granted Class III is more on a technical chart side, both the ADX and MACD indicators suggest positive momentum in the short term for the Feb and March contracts.  Yesterday Class III was looking to build upon that momentum until the pull of spot butter weakened the dairy complex; bringing Class III with it. That apparently was a bad sign of things to come for the Donald as well as he finished runner up in the Iowa caucus. Time will tell if either can turn things around! Class III will have the GDT auction and the Donald will have the New Hampshire caucus. 

Cheese futures traded mostly sideways with no definite direction coming out of spot. We did see 1 bid for barrels yesterday which pushed the market up 2 cents and they now sit a penny below the blocks which are at $1.46/lb and $1.45/lb respectively. We are estimating an increase of 1.7% vs last year as well as a 1.8 % increase vs. previous month in total cheese production for tomorrows December dairy products report. Full estimates near the end of today’s report. There is a winter storm warning for most of the upper Midwest through Wednesday. The upper Midwest is more accustomed to these types of storms, but we still could see a disruption in milk pickups from the farm, temporally slowing down cheese production. The impact of this storm coupled with the bullish technical outlook for the nearby Class III could cause a short term rally in both Class III and Cheese futures.  A tighter cash market on whey has helped whey futures rally the past two trading days. Gains however should be limited with firm cheese production and in turn whey production.

We look for Class III and cheese to open mostly lower, whey steady.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

0

$1.4600

UNCH

0

0

 

BARRELS

0

$1.4500

UP 2 

1

0

NFDM

GRADE A

8

$0.7100

DOWN ¾

1

0

BUTTER

GRADE AA

2

$2.0975

DOWN 12 ¼

0

0

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Class IV, Nonfat, and Butter Futures

A 12 ¼ cent move down on spot butter sent most of the 2016 butter contracts limit down. Class IV followed suit as all of the 2016 contracts settled down on average 18 ½ cents. Despite the big decline on the spot market yesterday we still seem to have a lot of buy side interest and the fear of sharply higher prices is still fresh in the minds of market participants. On the cash side of the market there seemed to be increased buying interest for butter last week. This increase can be attributed to end users setting up orders for the Easter and Passover holidays. Butter has been insulated from outside markets by domestic demand, so a softer GDT likely will not be a driver for US prices. Our estimates have December butter production increasing 3.3% vs last month and 12.6% vs last year. Even with a higher production number, butter has repeatedly thrown fundamentals to the wayside. We still expect that holiday demand will keep this market above $2.00/lb.  

NFDM continues to see strong demand in the lower 70 cent range, as we saw 8 loads traded yesterday. Since last Tuesday 22 loads of NFDM have been traded during the spot call. Not only was spot volume impressive, so was futures volume totaling over 300 contracts. News coming out of Europe is that they have started unloading their product on the world market at around 65 cents/lb which should keep domestic prices suppressed for the short term. We are expecting a softer GDT here this morning, which will likely continue to push NFDM contracts to fresh lows. 

We expect class IV and the products to open mostly lower in anticipation of a weaker GDT.
NZX Futures

NZX futures settled unchanged, butterfat products, to sharply lower, powders, yesterday ahead of the GDT auction this morning. We look for soft prices on today’s auction once again, especially in light of the improved milk production seen in December.

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Grains

It was a lower day across the board for the grains but losses were limited despite the surprise from the CFTC in the form or fewer fund shorts than the market anticipated for corn and wheat. Corn, soybeans and wheat all settled well above their intra-day lows despite notching slight declines. News of active selling from Argentina should keep a lid on the corn market for the time being, even with export inspections coming in line with weekly estimates. Total crop year exports are still down 21% compared to last year. The South American harvest will pick up over the next few weeks and it will be interesting to hear if the strong production numbers expected are verified. If they are we’d look for weakness in the grains and perhaps a move back toward the lower end of our recent trading ranges.

We expect grains to open mixed within a couple cents of unchanged across the board.

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