Morning Dairy Comments, 02/26/2016

Friday, February 26, 2016


General Market News

  • US Q4 revised GDP up 1% vs. 0.4% growth expected
  • G20 meeting in Shanghai to begin to discuss response to darkening global economic landscape
  • Venezuela’s oil minister said would meet with top global oil producers to discuss efforts to stabilize oil market
  • China’s central bank highlights scope for policy stimulus http://goo.gl/NexFx2
  • Dairy seeks state-issued bonds to build milk processing plant http://goo.gl/EWD5SN

 

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Class III, Cheese & Dry Whey

Class III and cheese futures prices got a reprieve from this week’s rout as the market consolidated recent losses.  Typically after a three-day move (up or down – in this case down) markets will see some type of “course correction” and that’s really what yesterday was all about. Stability for spot block cheese and a slight bounce on the price of barrels further coaxed some firming price action for futures. But we’re still talking about some of the weakest price action on spot cheese we’ve seen in some time overall this week.
In a sea of what seems to be mostly negative news for the dairy markets specifically and the economy in general, it is worth noting that we’ve received some interesting information about durable goods orders in January. Total durable goods orders were up 4.9% from December ’15 to January and up .6% from last year. There are parts of the report that certainly corroborate general economic weakness: like when you exclude transportation, total orders were down 2.5% from last year. Overall the report doesn’t seem to us to be as bleak on the economy as the talking heads would have you believe. We’ll see how things progress moving forward, but we think that the U.S. economy may just be on better footing than meets the eye and that could very well be a good thing for domestic dairy demand during the first part of this year.

For the week ending February 13, dairy cow slaughter under federal inspection was down 2.98%, at 61,800 head, compared with the same period the previous year. Year-to-date slaughter levels are 0.9% lower than 2015 levels, with 431,200 head slaughtered.

The Central Mostly Dry Whey powder price was down 0.25 cents from the previous week at 24.00 cents, while the Western Mostly price was steady at 25.00 cents.

We look for Class III and cheese to open mixed/slightly higher, dry whey steady.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

1

$1.4500

UNCH 

0

1

 

BARRELS

3

$1.4200

UP 1 ½ 

1

0

NFDM

GRADE A

3

$0.7475

UNCH

1

3

BUTTER

GRADE AA

0

$1.9875

DOWN 1 ¼ 

1

1

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Butter and Non-Fat Futures

The butter market has garnered the limelight this week. After Tuesday’s Cold Storage report that showed a massive January butter build, prices have fallen and sentiment has turned quite bearish out there. Spot butter fell to $1.9875 – a level not seen in six month (early August 2015). Interestingly, however, butter futures – which settled limit down pretty much across the board on Wednesday – finished mostly 1.00 to 3.00 cents lower yesterday – not as much as I think some expected.  And prices traded down into the low $2.00 level on the second highest tally of trading volume ever: 599 contracts. So we have a host of new selling for the forward curve, but we also see that commercial buyers still want to own a low $2.00 price. And we don’t think they’re going away today. 
Cream sales are softer, Easter orders are likely pretty much done, and we’re building butter inventory like it’s our job. Why the support at $2.00? Well, we still see that butter buyers are taking a much more aggressive approach to risk management. They don’t want to buy $2.00 butter necessarily, but they really don’t want to buy $2.50 or $2.80 – something that has become far too prevalent in their eyes lately. So they’re doing what they should be doing: taking in the news, but proactively pricing their fat needs. Although 196 million lbs. in storage is a big number from a few months ago and although it foreshadows the potential for some inventory numbers we haven’t seen since 2013 sometime this year (think 300 mil lbs. +), the fact is we’re not there yet.
Spot Butter Chart – Monthly (Green line is long-term trend line)

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NFDM future got a little bit of a boost yesterday finished from unchanged to 1.800 cents higher on moderately heavy volume. And it’s opening firm again this morning. The NFDM looks poised for more strength as well. Granted the spot market is fairly stable here lately, but the futures market set-up is less so. Speculative shorts are now pegged against buy side hedgers who are finding less value in the physical purchase for long-term pricing needs. If they get mixed up with shorts looking to cover, the NFDM could become quite one-sided and those futures prices will jump in short order. It may not last, but if we look around the dairy complex this morning – NFDM has the most potential of rising.

We look for Butter. NFDM and Class IV to open steady to higher.

Grains

Corn futures were pushed to their lowest levels in a month, aided by funding selling of 13,000 contracts, as weekly exports sales were reported in line with estimates.  The Chief Economist of the USDA estimated corn acres for the coming season at 90 mln, slightly above trade estimates of 89.7 mln, despite calculations that have soybeans providing a better financial return in the high producing state of Illinois.  The USDA is forecasting an average cash corn price of $3.45/bu in 2016 based on the increase in carryout derived from lower demand and high yield projection. 

Soybean contracts moved lower on the day after a poor showing in the weekly export sales report.  Export sales for soybeans were estimated at 328.3 tmt for the week versus 459.2 tmt during the same week last year.  South American soybean basis has fallen dramatically over the past week which has closed the window of opportunity for additional U.S. export demand.  The USDA estimated soybean acres for 2016 at 82.5 mln, 0.9 mln below trade expectations.  The USDA’s average cash soybean price projected for 2016 is $8.50, 30 cents below the

average 2015 price. 

USDA Ag Forum Estimates

 

We expect grain markets to open mixed.


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