Morning Dairy Comments, 02/17/2016

Wednesday, February 17, 2016

General Market News

· Australia dairy exports up 3.2% year to date (July-Dec)

· Oceania Banks feel the pain of the dairy downturn

· China’s central bank injects another 10 billion yuan into banking system

· OPEC chief to meet Iran, Iraq oil ministers for production talks



Class III, Cheese & Dry Whey

Fresh selling during the spot call helped push futures lower to start this shortened holiday week. The price of Barrel cheese fell 2 cents during the call, which brought in new futures sellers to what has been a rather quiet market over the week or so.  Class III futures volume registered at just over 1,300 while cheese futures saw over 600 contracts change hands.  Interestingly, Open Interest was up sharply in both – and those new contracts were primarily in the months of April thru December. The new selling is taking advantage of the premium in the forward curve. That will likely continue as those contracts are at or making new pricing lows right now, so there is a technical aspect to the weakness as well.
A lot can happen between now and July, for example, but we’re a little too far removed from summer weather scares to have much impact. The trade seems to be more focused on what (if anything) March cheese promotions might do and what Easter sales will look like.  Perhaps more importantly, however, will be the health of the cheese market following the early Easter holiday. 

For now, the market continues to seem in balance at or around current levels.  We’d expect, however, that if spot prices were to move again today it would be to the downside. 
Dry whey opened and closed unchanged with just a smattering of trades (6 total).  Technically, dry whey looks like it may have rounded out a bottom over the past month or so.  However, with little in the way of bullish news, the few cents the futures market has tacked on since mid-January may be a little rich to continue driving fresh buy side activity.  We look for a pullback on dry whey.

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


Spot Session Results

























UP 2











Class IV, Nonfat, and Butter Futures

The steadfast Class IV futures contracts remained unchanged yesterday despite the contrasting performance of its component markets as all contract months settled unchanged for the day.  The butter futures tumbled lower after both bearish GDT and spot session results gave way to heavy selling pressures which resulted in the 2016 contracts settling between 0.850 and limit lower as nearly 270 contracts changed hands during an active trading session.  Possibly more telling than the performance of the futures contracts was that of the options.  All 258 of the options contracts traded yesterday were call options.  The flurry of call options traded could be attributed in part to the establishment of new hedge positions and the rolling lower of call options already held on the books as some traders looked to capitalize on the recent weakness of the butter market.  But without a single put option trading is the market telling us that the bearish trend of late is to be short lived, that we are now entering a price range that will draw buyers back to the market to capitalize on values not seen since early January?  Holiday demand has come and gone for the most part, shifting now to needs focused on the ice cream churns and other products that will come into fashion as we shift from winter to spring and summer along with inventory building for the final months of the year.  While the potential for further price declines is inevitable, we expect to see some value hunters to step up in and around these current levels.

The NFDM market finds itself in a quite dissimilar situation.  The surge higher in prices yesterday may have been the result of the better than anticipated performance of the powders during the GDT auction, leading to a rush to cover short positions to lock in hedge profits and some technical buying as the near dated contracts pushed through established resistance of the past two weeks as highlighted below in the 2nd quarter pack chart. 


The world is still awash in powders which we have noted here with some regularity so we will not those points which have already been made.  Any continuation in a rally in the NFDM futures should see selling interests step in to take advantage of the improving forward curve.

We look for the butter to open mixed, NFDM steady to 0.5 cents lower, Class IV steady



Grain markets pushed higher yesterday on the prospect of export demand shifting from South America to the U.S. due to the backlog of cargo ships awaiting loading.  Reports of 163 ships lined up awaiting an estimated 9.7 mmt of grains and soybeans have the market hopeful that some of the demand for the cheaper South American crops will ship to U.S. producers rather than wait out the unsnarling of the South American loading schedules. 

The corn futures tallied gains of 4.25 cents in both the March and May contracts aided in part by funds credited with purchasing an estimated 11,000 contracts.  Light farmer selling was noted on the minimal price increase as the extended range bound price action of the past couple months has diminished the potential for a post-harvest rally.  Corn export shipments to date are running 9% behind the pace needed to reach the USDA’s annual estimate.

Soybean futures rallied in kind off the South American shipping news, adding 7.00 cents in March and 6.00 cents in May as funds were thought to have bought 9,000 contracts.  The January NOPA crush figures announced yesterday mid-session helped to quell any bullish fervor, posting at 150.5 million bushels, 3.3-7.5 million bushels below trade estimates while 12.2 million bushels lower than during January of last year.  Soybean loadings year to date are running 3% behind the pace needed to hit the USDA’s annual estimate.  China’s January soybean imports were estimated at 5.66 mmt, down 0.33 mmt year over year, marking a greater decline than the market had been anticipating.

Wheat futures pushed higher in sympathy to the corn rally, with gains of 6.75 cents in March and 6.25 cents in May.  Any additional price appreciation should be contained as Russian wheat saw its values fall over the last week making their wheat the most attractive for Egyptian purchases.  U.S. wheat export loadings are running 3% behind the rate needed to reach the USDA’s annual estimate. 


Grain markets lower overnight, corn to open down 1 cent, soybeans down 2 cents and wheat down a penny 


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