Morning Dairy Comments, 04/21/2016

Thursday, April 21, 2016


General Market News

clip_image001

clip_image003

Class III & Cheese

The recent strength for class III and cheese futures was stunted yesterday as early strength gave way to fresh selling after the spot call. The block and barrel market were both bid up, but stopped dead in their tracks in the mid-$1.40’s as sellers re-emerged. That good-two sided trade brought into question the validity of the recent futures price strength and set the stage for increased selling ahead of yesterday’s milk production report. Trading volumes spiked on what looks to be at least a short-term top to this 4 week rally. Class III traded over 1,500 contracts (high water mark for April) while over 700 cheese futures changed hands – that’s nearly 3 times the volume of Tuesday.

Enter bearish March Milk Production report stage left. Record high milk per cow in the 23 major milk producing states contributed to milk production being up 1.8% vs March 2015 and 2.1% vs. last year. That percentage increase is not far off from historical demand growth for dairy products, but it was well above expectations. Ultimately, greater milk volumes relative to our current inventory levels is exacerbated by the fact that producers are – or have been - holding onto more animals. The report caused a lower trade overnight and will likely keep a lid on milk today.

We know there is correlation between milk and corn, but sometimes it can take months to figure itself out.  For the moment, corn has pushed to new highs for the year in a very, very, very short period of time, but the dairy complex seems to have been rather insulated so far. Yesterday that trend continued as grains finished sharply higher and Class III lower. The chart below shows the divergences between May 2016 grains and Class III futures contracts, with the orange line representing Class III. Should the grain complex (and Crude Oil) continue to trot higher, that lid on milk could get lifted. But as of this morning, the negative news for dairy is the driving force.

clip_image004

NDPSR showed block cheese sales at 13.5 mil lbs, barrel cheese at 11.4 mil lbs, and whey at 7.2 mil lbs for the week ending 4/16. For cheese, individually, block and barrel sales volume was at its highest level since the week ending 1/23. However, combined sales volume was at its highest level since July of 2015. This confirms reports that although cheese production has been strong, fresh cheese sales have been able keep up. The mountain of supply in cold storage is still hanging over the market, but it seems that we are not adding to it as fast as previously thought.

Weekly whey sales were on par with recent weeks. NDPSR prices were down half a cent to $0.2432/lb.  

We look for Class III, Cheese and Dry Whey to open lower.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

1

$1.4400

UP 1 ¼ 

0

0

 

BARRELS

4

$1.4500

UP 3

1

1

NFDM

GRADE A

0

$0.7475

UP ¾ 

1

1

BUTTER

GRADE AA

1

$2.0400

DOWN 3 

1

0

clip_image006

Class IV, NFDM & Butter

Sales on fresh butter reported by NDPSR was strong at over 11 million pounds, but not too far from the weekly average of 9.3 million pounds fir 2016. It seems that $2 butter is here to stay give or take a few cents. Will we see rallies again like in previous weeks? Yes, but in an efficient spot market those rallies should be met with additional loads being brought to the spot session. That hasn’t always happened in the past, but that is the butter market we live in. For now, pressure from domestic dairy pricing and bearish reports should keep a lid on butter futures. Volume for butter futures picked up a bit yesterday as sellers found fresh news from a spot session that was down 3 cents to $2.04/lb.

NFDM futures settled mostly lower yesterday, with the June 2016 contact being the only contract to settle UNCH, which was also the highest volume traded contract yesterday. On the options side, there was quite a bit of activity for June NFDM puts. With the June 2016 NFDM futures contract being the only contract traded not settling lower, coupled with the increased activity on the options side; would suggest that the buyers of the puts were laying of risk by going long futures. It is interesting to see sellers follow through yesterday on the hands of a higher GDT, and lower dollar index (compared to last auction). Recent weakness in NFDM futures may be from pressure on the domestic dairy market as a whole. NDPSR volume on NFDM was strong at 17.22 million lbs. 3.7 million lbs. above the annual average.

We look for NFDM, Butter and Class IV to open steady/lower.

Grains

Markets can do whatever they want and nowhere, in our view, is there a better personification of that than the grain complex lately.
At first it didn’t seem beans could continue their climb towards $10, after starting off yesterday down over 10 cents – but have no fear upside was clear. Funds were thought to be buyers of beans again, 56,000 contracts the last two days alone. But interestingly, yesterday’s soybean rally shows a decline of Open Interest by 33,000 contracts.
clip_image008
Corn was able to post fresh highs for the move yesterday and December closed over $4.00 for the first time since December 4, 2015. Funds decreasing their short position as well as continued strength in exports have helped support this market. Farmers have been selling into the rallies of corn. With continued gains in crude and weaker dollar, it isn’t out the realm of possibility that farmers may step aside and see how high corn can go. That said, we’re hearing chatter of $4.20, $4.50 and even $5.00/bu being thrown around out there, which is a “tell”. This rally may be long in the tooth and without real problems swift setbacks are on the horizon in our opinion.

Corn and Soybeans are called to open higher in line with the overnight, but it may be close to high noon so brace yourself for a showdown.

clip_image010

clip_image012


Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

Market Intelligence Free Trial