Morning Dairy Comments, 04/07/2016

Thursday, April 07, 2016


General Market News

· Case against low-fat milk is stronger than ever http://goo.gl/IjkRlz

· Brazil’s Congress moves closer to impeaching President http://goo.gl/GnOJDQ

· McDonald’s chairman Andrew McKenna to step down http://goo.gl/SSdQ3E

· U.S. Dollar sinks again after Fed remains cautious http://goo.gl/LpuMtk

· Dust Storm 100 miles wide blankets much of Texas Panhandle http://goo.gl/KhBmuQ

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Class III & Cheese

It was a tale of two trades for Class III futures yesterday as contracts through 2016 were pressured a bit lower while 2017 contracts through mid-year traded higher.  The overall light volume of the trade is suggestive of a market that has found some sense of temporary equilibrium as the spot prices of cheese remains range bound between $1.40-$1.50, although blocks did put in a low for the year at $1.4325. Nearby contracts have attempted to carve out an area of baseline support over the past couple weeks as the trade consolidates the chronic bearishness which has been overshadowing the market for months. Cheese futures traded lockstep with Class III as both have now retraced back to technical levels of support as we wait to see if this will be the time where spot cheese breaks the $1.40 mark. That’s a level that has held time and time again, leaving the trade scratching its head as it stares down an ensuing wall of milk and total cheese inventory levels that have swollen to 1.178 billion pounds and are likely still in expansion mode. Domestic demand remains strong however, in light of the 18% downdraft in exports from year ago levels, domestic demand will have some heavy lifting to do in order to compensate for the current fundamentals.

That said, and by no means am I calling a bottom here as I truly believe there’s another downdraft in order, we do need to respect a couple of outliers that hold the potential for material impact on the markets moving forward. One being a sustained move lower in the USD, which offers some hope to a battered export arena. Another would be that most of the bearish news may be baked into the cake already, and with so many on one side of the ship, it could be at that tipping point and over it goes. That would inflict some pain on those on the short side of the trade and markets love to inflict pain. The third outlier, and possibly the one that holds the most disruptive potential, is weather. Much has been discussed about the fallout from El Nino in certain parts of the world, however the threat moving forward lies in the transition period between El Nino to La Nina. Forecasts have called for a progressive transition to take place in late summer, thus reducing the risk of adverse effects on the 2016 growing season. However, there are some models now predicting a more rapid onset of La Nina which could translate into hot and dry conditions in the Midwest come June. If those two words, “hot and dry” become everyday conversation, look for the bull to begin his trot.

For the week ending April 2nd, the National Dairy Products Sales Report showed blocks moving higher, to

$1.5237 on decreased sales volume of 11,968,483 million pounds. Barrels moved higher as well to $1.5104 on increased sales volume of 9,289,263 million pounds. The whey price scratched its way back to $0.2517 on increased sales volume of 8,042,421 million pounds.  

Class III mixed, cheese and dry whey to open steady

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

0

$1.4325

DOWN 1 ¾

0

1

 

BARRELS

0

$1.4425

UNCH

0

0

NFDM

GRADE A

9

$0.6900

DOWN 2 ¾   

5

0

BUTTER

GRADE AA

21

$2.0800

UP 7 ¾ 

1

1

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Class IV, NFDM & Butter

The butter trade stole the show yesterday as limit higher action in the May-June timeframe sparked a broad rally through Q1 2017, with sharply higher prints to boot, as the spot price tacked on 7 ¾ cents with an impressive 21 loads changing hands along the way. Here we go again? Really? The first run to $3.00 was warranted in hindsight, the second more a result of fear gripping the trade, but a third time around with current fundamentals as they are would be a stretch. With current inventories expanding, fresh cream available and a seasonal period of weakness upon us, the logical move would be lower. Oh wait…this is butter! Toss out rational thought and usher in crazy because that’s where this thing has returned to. That said, you must respect the yellow giant as it shrugs off the fundamentals and builds off of baseline support that has been carved out during the month of March. As evidenced on the chart below, the market has “rounded” a bottom demonstrated by the curvature of the past few weeks. A move to 211.750 should be expected for the May contract, notwithstanding a meltdown on spot, with the possibility of a larger move to 217.000 and possibly 222.000 before the trade would have to contemplate the sanity of a full retracement back to the 238.000 high, made back on January 15th when spot was at $2.25.

NFDM also tracked higher despite a lower spot call which saw 9 loads change hands on its way back down to $0.69, its lowest level since August, as shorts in the market took the opportunity to cover on the belief that a sub $0.70 spot price will be short lived. The trade has technical areas of resistance to the north that have proven formidable in the past, but a test of those cannot be ruled out in the coming sessions if spot can find some traction and probe to the upside.

For the week ending April 2nd, the National Dairy Products Sales Report showed butter moving higher to $1.9545 on a slight uptick in sales volume of 4,693,221 million pounds while NFDM shed value to
$0.7461 on strong sales volume of 19,162,355 million pounds.

May Butter~Daily

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NFDM and butter to open steady to higher, Class IV steady.

Grains

Grains managed to shrug off early weakness on the back of a sharply higher crude oil market as both corn and beans scarped out gains and decoupled themselves from the sharply lower wheat market, which lost 11 cents yesterday. It looked as though beans were headed to the woodshed as a breach of the 20 day moving average (blue line on the chart below) left little in the way of support until the 50 day moving average level (red line), about 20 cents lower. After the precipitous pre-report rally in March, beans are still looking ripe for some pressure to be exerted however it being so early in the 2016 growing campaign, we can expect pressure to be limited in nature as weather risk premium will remain in the market for the time being. It’s mush the same story for corn, as it’s just too early to assume the crop is made and for prices to seek out fresh lows.

May Soybeans~Daily

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We expect wheat to open steady to 2 cents lower, soybeans down 1-3 with corn 1-3

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