Morning Dairy Comments, 02/24/2016

Wednesday, February 24, 2016


General Market News

  • Trump sweeps to victory in Nevada
  • Australia Approves Sale of Country’s Largest Dairy to Chinese Buyer http://goo.gl/Esx7eO
  • McDonald’s Testing Chobani Yogurt in Parfaits, Smoothies http://goo.gl/qwG33d
  • Crude oil drops nearly 4%, battered by the no-production-cut blues http://goo.gl/kFUI7s
  • Deadly tornadoes tear through Deep South

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Class III, Cheese & Dry Whey

The sellers were out in droves in both Class III and cheese futures yesterday, driving values to fresh contract lows for a second day in a row on heavy volume courtesy, in part, to a soft spot call. Options volume was also heavy with over 3,600 class III options and over 1,000 cheese options trading during yesterday’s session. Price weakness and heavy trading ahead of what again turned out to be a bearish cold storage number that saw total cheese stocks swell to 1.178 billion pounds (full breakout below).

The market was likely expecting a bearish stocks number, so that was likely already priced in, but the fact that spot cheese is finding its way to the exchange and pressing back to the lower edge of the range has the market on edge. There’s a lot of cheese out there and more in the pipeline moving forward, which begs the question…will domestic demand be sufficient to carry the weight and keep prices from crashing lower from here? As with any market, it’s a function of supply and demand which has me thinking that we’re nearing the tipping point to where the full weight of consistently strong cheese production will bear down and break the market. Too much supply and not enough demand. High prices cure high prices and low prices cure low ones. You’ve heard it before and yes—prices have moved lower, just not low enough for the market to serve its function because the price signal to cut back production is only now starting to be received. From a technical standpoint, the market is oversold and due for a corrective bounce in the coming days, however the sustainability of any upside action will be called into question and those who step in to sell will likely be rewarded for it as they have in the past.

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

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

2

$1.4550

DOWN 2

1

1

 

BARRELS

1

$1.4375

DOWN 4 ¼

0

0

NFDM

GRADE A

5

$0.7450

DOWN ½

1

0

BUTTER

GRADE AA

2

$2.0850

UP ½

1

1

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Butter and Non-Fat Futures

Bids in the Class IV market evaporated after the release of the latest cold storage tallies and a reversal in butter spooked bidders and set the stage for additional pressure to be brought to bear in the short term. With butter stocks coming in 31.7% higher that year ago levels and 26.5% above a month ago, the trade will have its work cut out if a bullish wave is to materialize. Granted, stocks did come in lighter than expected, but the fact remains that there’s quite a bit of product out there at 196.1 million pounds. As with cheese, the question will be whether demand is sufficient to keep prices from tumbling and while we don’t expect the market to necessarily fall apart as a result of this tally, but it could prove difficult to keep a $2 handle on the yellow giant as we move forward. For the time being, the trade is wrestling with technical levels of interest which were breached last week and should now serve as resistance levels (blue line on April chart below).

The NFDM market continues to seek out direction as it has been loath to stray from the comfort of its short term 10 and 20 day moving averages. This has been the pattern for the better part of the month and without a breakout in the spot price, range bound futures trade will likely persist. The market does feel heavy though and with upside rally attempts previously stifled, we see no reason for that trend to shift any time soon.

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April Butter – Daily Chart

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We look for a mixed opening for Class IV, Butter and NFDM.

Grains

A wave of selling pressure blitzed through the grain trade yesterday, courtesy of a sharply lower crude oil market again raised the question of the health of the global economy. By the closing bell, corn was a nickel in the red while both beans and wheat shaved a dime on technical selling and an overall bearish picture. Granted, the unknown weather aspect for the 2016 growing season looms, but the trade is thirsting for something more to move on and without a real story, bullish action has been met with pressure. The latest downdraft in the crude oil market is only serving to further weigh on investor confidence as macro fears once again are brought to the forefront. Couple that with Saudi Arabia ruling out any production cuts, one has to wonder whether the February lows are in the cross hairs and with crude inventories rising by 7.1 million barrels to 506.2 million in the week ending February 19th, that is a distinct possibility. 

A Reuters poll ahead of the USDA Ag Outlook Forum pegged 2016 U.S. corn plantings at 89.65 million acres, up from 88.0 mln in 2015 but below the USDA's initial 90.5 mln ac figure. Soybean acreage was seen at 83.3 mln, up from 82.65 mln LY and the 82.0 mln ac government working number. All wheat planted area came in at 52.4 mln ac, below 54.64 mln LY and the 53.0 mln ac USDA working estimate.

April Crude Oil~Daily

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