Early Morning Update, 04/01/2016

Friday, April 01, 2016

General Market News


Class III, Cheese & Dry Whey

What cannot go down, must go up is not a saying, but that is how class III and cheese finished out the month of March. Over the past several trading sessions futures were mixed to slightly higher resulting in a general path of modest gains. And then yesterday, with spot stable and little fresh news to cause buyer worry, futures lit up with rather aggressive buying. Over 1,750 class III and over 950 cheese contracts changed hands in what was deemed to be end of month, end of quarter positioning gone awry.
Looking a little closer, we noticed that open interest for class III was sharply higher. Stripping out the open interest declines from the March contract coming off the books, class III open interest rose by just shy of 800 contracts yesterday. Add to that the surge in dry whey trading activity yesterday and this rally looks less like short-covering and more like some traders were looking to buy a synthetic cheese price via the class III market.
Overall, we don’t think a bear bounce is surprising or unusual. Markets have a tendency to bounce around particularly when most if not all the negative news is likely priced into the market for now and spot remains relatively stable. Yes, it seemed like there was a resurgence of spot selling – particularly on blocks – this week, but that has not shaken the futures market. And now we’re left wondering if spot – the cheapest price on the board – will catch a bid in the short-term as has happened so often in the past. The difference being that today we have record inventories of finished cheese and a surge of fresh milk.

For the week ending March 19, dairy cow slaughter under federal inspection was down 4.1%, at 57,900 head, compared with the same period the previous year. Year-to-date slaughter levels are 0.3% higher than 2015 levels, with 729,500 head slaughtered.

Class III, Cheese and Dry Whey are opening mixed.

Spot Session Results




































Class IV, NFDM & Butter

NFDM extended losses yesterday on heavy volume – over 400 contracts - and open interest largely increased on the weakness. Spot was rather quiet but we’d expect more sell side action in the coming days as the market feels heavy and looks poised to trade back beneath the 70 cents mark in the short term.

The Dairy Market News Western Mostly NFDM price was down 0.62 cents from the previous week at 73.63 cents per pound. Last week’s CA Weighted Average price was 75.11 cents, up 0.68 cents from the previous week.

Is butter playing us for a fool? The butter market continues to be well-supported – both in spot and futures – amid substantial milk production, swift growth in inventories and a very sluggish cream situation. We must not forget there is still some underpinning demand strength and there is likely some pipeline refilling going on after the Easter holiday. Also, the last several years of higher pricing continues to keep commercial risk managers busy hedging 2016 risk by buying both spot and futures. While we think the stronger argument today is for additional weakness on butter in April and while we find the support somewhat perplexing, the market seems more in balance today. And from a technical perspective, the last several months of activity really looks more like a nice, 50% or so correction in a larger, longer-term bull market. Although it seems unlikely today, summer weather, demand - something we may not even be aware of today - may throw the butter bears for a loop this year.


NFDM, Butter and Class IV are opening mixed.


The action in the grain markets yesterday after the release of the USDA’s Quarterly Stocks and Prospective Plantings Report lead to a massive decline in corn values. Corn futures settled more than 15 cents lower as the USDA estimated corn acres to increase by 3.6 million over last year, at the expense of soybeans and wheat, to 93.6 million acres which was well above trade estimates and the projections released during the recent Ag Forum. Funds were estimated to have sold 40,000 contracts during the decline. 
There should be some shift in acreage in the coming weeks due to weather and financial related considerations that could see corn acres cut in favor of soybeans. Soybeans hold a financial advantage to corn as the beans are positive versus cash flow expenses while the corn is lagging. Soybean acres were cut by 450,000 to 82.2 million which buffered the market from the weakness in corn. The soybean futures managed gains of between 1.50 and 2.00 cents as funds were credited with buying 3,000 contracts.  Wheat futures rallied between 8.00 and 9.50 cents after the surprising 1.4 million acre cut to all wheat plantings. Funds were estimated to have purchased 7,000 contracts in light of this revelation. The unprofitability of HRS wheat in the Upper Midwest is credited with a portion of the acreage shift to the more financially rewarding corn and soybeans.


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