Morning Dairy Comments, 04/14/2016

Thursday, April 14, 2016


General Market News

· Dairy groups upset with WHO infant milk recommendations http://goo.gl/3JWOsv

· CME Group to close New York trading floor at end of year   http://goo.gl/EQITMQ

· Nestle shares rise on better than expected sales growth http://goo.gl/MHrdnX

· McDonald’s targets private equity firms for its planned sale of 2,800 restaurants in North Asia http://goo.gl/5QwPTp

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Class III & Cheese

Class III and cheese futures couldn’t extend gains yesterday as sell side activity is picking up to reward the recent rally. And such a rally has quietly been rather impressive amid such a recurring theme of bearish fundamental dairy information.
The July to December Class III pack average gained nearly 70 cents since a low established around St. Patrick’s Day through Tuesday of this week. The second half cheese futures pack gained around 7 cents during the same time period. Meanwhile the cash price of block cheese is 6 cents lower (Technically, barrel cheese was at $1.4200 on St. Patrick’s Day, but on the 18th of March the price spiked to $1.50).  The point is, over the past several weeks futures have rallied while spot prices have largely fallen and the bearish news continues to permeate discussions. There may eventually be a dairy-based reason for a market rally, but so far we haven’t seen any. This is a rally based in large part on outside market influences. Crude oil is up 10% over the past several weeks while the dollar fell to 6 months lows this week (down around 3% from mid-March).

We can talk about the ‘whys’ and ‘hows’ until we’re blue in the face. The key here is the perception of the rally. By and large it seems that there is a willingness to sell this recent rally. Producer sell side interest is picking up and although buy side activity remains relatively constant for the deferred contracts, it is somewhat muted and lacking worry. The second half class III average is trading around $15.00, which is both a technical as well as a psychological level of resistance. We’d expect that short of having some of the buyer interest present in spot yesterday make a significant difference in the price of cash cheese, class III and cheese futures are close to hitting a lid on upward price mobility.

We look for class III and cheese to open mostly lower, dry whey steady.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

0

$1.4225

UP ¼ 

1

0

 

BARRELS

12

$1.4275

DOWN ¾

1

1

NFDM

GRADE A

0

$0.7150

UP 1  

1

1

BUTTER

GRADE AA

8

$2.0700

UNCH 

1

0

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Class IV, NFDM & Butter

Butter contracts settled mostly lower after an active spot session that produced 8 trades at the unchanged value of $2.07.  The butter market continues to cause a lot of head scratching as to why we are seeing the turbulence in prices that at times runs contrary to the underlying fundamentals.  The strong rally through much of this month came at a time when demand is historically expected to decline, yet contracts surged forcefully higher.  Now after reaching a technically overbought condition we have seen some of the gains pulled out of butter prices, yet without a noticeable presence of sellers during today’s spot session we will see values again move higher as buy side hedgers are fretting over another potential sharp move higher.

The NDPSR released yesterday for the week ending 4/9 showed the butter price holding steady, gaining just 0.17 cents to $1.9553 while weekly sales were projected to have slipped 11.5% lower to 4,291,594 pounds.

NFDM futures finished the day with mixed pricing with subtle changes in the nearby months despite the penny gain tallied during the spot session.  The stronger gains were added in the deferred months as the October and November contracts posted gains of at least 1.500 cents adding value into the forward curve.  With over 250 contracts trading on the day open interest increased by 103.  Buy side interests are looking at a market that has been a mostly range bound for the past two months with contracts near the lower bounds of the ranges.  Those on the sell side continually fret over the implications of a global surplus of product that may hamper any significant price recovery for an extended period of time.

The NDPSR for the week ending 4/9 saw the NFDM price fall 1/01 cents lower to $0.7359 with weekly sales increasing by 4.5% to 20,153,163 pounds. 

We look for NFDM to open lower, butter to open steady to a penny higher.

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Grains

The grain markets all surged higher led by the meteoric rise in soybean values.  Corn futures jumped sharply higher on fund buying, credited with purchasing 20,000 contracts as index funds continue to pile in, as the market broke through significant technical resistance levels.  This rally has the market pricing in a crop yield similar to the drought years of 2002 and 2013 or a downward revision of projected planted acres of up to 5.6 million acres.  The market seems to be pricing in an as out yet non-existent weather event while this price surge has further hampered future export prospects.  On the other hand producers have found the rally they have spent months dreaming of to sell into as funds were thought to have bought 20,000 contracts on the day. 

The soybean market was the belle of ball yesterday, screaming higher on weather concerns and the prospects of diminished planted acres to come lowering the projected carryout as producers happily sold into a price increase that hit the highest levels since August of last year.  Chinese imports have exceeded expectations by 1.5 mmt in March, up 1.6 mmt year over year, as the year to date total for their imports is running 5 mmt above last year’s levels.  Funds were credited with purchasing 15,000 contracts.

Wheat futures tallied gains in sympathy to the strength of the soybean and corn rallies despite the rains that are expected to fall throughout the Southern Plains that could eliminate the drought concerns by the end of the weekend.  Producers are now considering shifting some HRS acres from corn as previously thought to soybeans based on the projected financial returns due to recent price action.  Funds were thought to have added 6,000 contracts throughout the day.

We expected the grain markets to opener weaker today, corn and wheat down 1-3 cents, soybeans down 5-8.

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