Morning Dairy Comments, 02/08/2016

Monday, February 08, 2016


General Market News

· USD spikes higher after two consecutive days of sharp losses on Friday

· Dow set to open the week down over 200 points

· Gold jumps to 3 month high as market looks for safety

· Arla to cut 500 jobs http://www.foodmanufacture.co.uk/Manufacturing/Dairy-firm-cuts-jobs

 

Class III and Cheese

Volatility was the rule not the exception across the board last week and that was true Friday as well. From crude oil, to the USD, stocks, and of course dairy sharp price movements were seen. Butter was the most volatile market on Friday and throughout the week. Both Class III and cheese futures pulled back to wrap the week in sympathy with lower butter pricing and a stalled spot market that saw blocks and barrels remain unchanged at $1.47 and $1.4650, respectively, the trade is facing a conundrum. That being whether or not a case can be made as to if all the macro bearishness facing dairy prices have been baked into the cake or not? If Friday’s failure to build on the gains seen during the week is any indicator, we have our answer. That said, it bears mentioning that our radar is up, looking for the signs that the boat has become overcrowded on one side and ready to flip, as is so often the case with markets. It just feels that we’re not quite there yet, with more downside likely in the offing if spot prices cannot muscle through the $1.50 mark and hold there.  

The charts paint a mixed picture though they look more bullish than bearish. For the week the April to June pack average was up 5 cents to $14.25 but as you can see we were well below the intra week highs and though we are above the short term MA’s with Friday’s session this has more the look of a false breakout. Action early this week will be key for the technical side of the marketplace.

Daily April to June class III pack average:

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We previously mentioned the USD and while it hasn’t been a major talking point of late in the commodity markets, due to the tight trading range seen over the past two months, we have to take note due to the sharp declines seen last week. If the downside breakout becomes a trend will most certainly will become supportive for commodities moving forward. In an almost inverse of what transpired on the dairy markets big declines were seen early in the week but Friday’s session saw a strong rebound. We tend to feel as though the USD will develop into a new slightly lower trading range but it bears keeping an eye on.

Daily March USD index:

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Dairy Market News reports the cheddar cheese price for January 25 – February 5 in Oceania at $1.4175/lb., up 7.37 cents from the previous period. Dairy Market News reports the sweet whey powder price for January 25 – February 5 in Western and Eastern Europe at 27.78 cents per pound, unchanged from the previous period.

USDA’s monthly Dairy Products report, released Wednesday, showed American cheese production in December gained 0.7% from 2014 levels and total cheese was up 1.2%. 2015 total cheese production was 2.4% above the year before, and American cheese production was 2.3% higher. Butter output gained 4.3%, while nonfat dry milk decreased 10.3%. Butter output for 2015 was down 0.4% from 2014 levels, while NFDM output gained 2.8%.

Slaughter for the week ending January 23 was down 5.04% from a year ago, at 62,200 head. Year to date, slaughter is 1.6% lower than 2015 levels, with 239,700 head slaughtered.

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

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

1

$1.4700

UNCH

1

0

 

BARRELS

0

$1.4650

UNCH

0

0

NFDM

GRADE A

2

$0.7500

UP 1 ½

2

3

BUTTER

GRADE AA

1

$2.1700

DOWN 3

0

0

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Class IV, Nonfat, and Butter Futures

By far the most explosive trade in the dairy complex occurred in butter last week and Friday was no exception. A three cent downdraft in the spot session sparked a meltdown in the futures, with many contracts falling the limit on heavy volume. Interestingly enough, there has been so much premium injected into the market over the past few weeks that today’s sharp downdraft did no technical damage, only bringing contracts back to levels of support. That will make trade early next week quite interesting as there’s wide open space to the downside if additional pressure is brought to bear.

Daily April to June cash-butter pack average:

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Dairy Market News reports that the 82% butter price for January 25 – February 5 in Western and Eastern Europe was $1.3495/lb., unchanged from the previous period. Oceania’s price was $1.3835/lb., up 1.14 cents from the previous period.

As has been the case numerous times before, the selling of rally attempts has been rewarded in the NFDM market and Friday was no exception. With futures retracing to the upside for much of the week, many contracts were staring at technical resistance levels which brought out the bears and drove prices into the red through the bulk of 2016 on heavy volume as well, despite the spot price trading 1 ½ cents higher to $0.75. Was Friday’s action just mere profit taking from the recent northbound hike? Perhaps. But more likely it was a function of the continuation of the bearish trend that has been intact for months now. It feels like more downside will be in play to begin the week as the trade will have to wait until the milk production report on the afternoon of the 19th before any fresh information of material substance comes online and will have to wait until the following Sunday night to react to it. Cold storage comes on the heels of those numbers on the 23rd, so there’s quite a bit of time between now and then which will put the onus on spot movement for direction. Below we include the April to June pack chart which was up 2.225 cents on the week but showed signs of slipping at the 20 day MA.

Daily April to June NFDM pack average:

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Dairy Market News reports that the skim milk powder (SMP) price for January 25 – February 5 in Western and Eastern Europe was $0.7938/lb., unchanged from the previous period. The price in Oceania was 82.21 cents, unchanged from the previous period. Weekly domestic DMN prices included below.

We expect butter to open steady to higher, NFDM and class IV mixed  

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NZX Futures

With the sharply lower GDT result on Tuesday NZX prices were under pressure throughout most of last week. On the week nearby WMP prices fell by $210 to $1,830, SMP prices fell by $70 to $1,730, AMF prices were down $250 to $3,400 and butter futures were down $300 to $2,900. Losses weren’t confined to the nearby months as deferred futures were sharply lower across the board as well. Price action for the coming week will likely be driven by US and EU price movement ahead of next week’s auction on the 16th.

Grains

Grains closed out the week on a lower note as the upside grind for corn and wheat appears to be drawing to a close. Friday’s close pushed corn down to $3.6575 a loss of 6.25 cents for the week. Wheat hit a fresh two week low settling at $4.6675 down 12.50 cents on the week. Soybeans also hit a fresh 3 week low settling at $8.6750 down 14.75 from the prior week. As you can see in the chart below we failed at all the major MA’s last week and it looks as though we may dip to test multi month lows in the $8.50 range in the coming weeks which may be brought on by SA harvest pressure. Expectations are for a very large crop despite some recent declines in their final estimates. This week we have the February USDA report to look forward too, coming up tomorrow. We wouldn’t expect many changes as the USDA will only make adjustments to the demand side of the equation on this report. Estimates are included below.

Daily March Soybeans: 

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We expect grains to open steady to slightly lower across the board today.

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