Morning Dairy Comments, 05/02/2016

Monday, May 02, 2016

General Market News

· Chinese market for dairy products tipped to recover

· As crude oil pushes through $45, U.S. producers rush to hedge prices

· Gold rallies above $1,300, highest level since January 2015

· China’s official factory activity expands in April, but at slower pace

· Darigold offers membership to McMinnville dairy co-op farmers



Class III & Cheese

Class III and cheese futures lost any upside momentum of Thursday’s bounce on Friday and settled mostly lower to close out the week. Trading volume dropped off slightly on Friday with 941 class III and 400 cheese contracts trading hands. Prices slumped as any itchy buy side trigger fingers were cooled when spot cheese exited the week in a calm fashion.

CME block prices were down 5.25 cents from last Friday to settle at $1.3700/lb – the lowest price in just over 5 years. The price of Barrel cheese was 1.25 cents lower, at $1.4125. It wasn’t just price action that had the trade on edge last week, but the volume. 39 loads of blocks traded and 13 loads of barrels changed hands.
To add to the uncertainty, barrel cheese is now 4.25 cents over blocks. While it’s not unusual to see the barrel price eclipse the price of blocks (particularly this time of year as barrel demand heats up), our concern is how this will unfold over the next few weeks. Generally in a bearish price environment we’d expect to see barrels come back down to adjust the spread. But we’re not so sure about that action now. Anecdotal discussions seem to suggest barrel cheese is more widely available than blocks. If this is in fact the case, we wouldn’t be surprised if block cheese adjusts upward to help close the spread this week.

The other considerations to start this week are not so much dairy related, but currency related. The US dollar hit an 18-month high against the yen last week as the Bank of Japan refrained from further cuts. Meanwhile, gold hit a 15-month high. We’ve mentioned that the US dollar is correcting lower even back in March and, from our vantage point; the dollar is not done with that downward correction. In fact, we expect more weakness on the US dollar over the next several months. That may not have an immediate impact on US dairy exports, but we’ve got this on our radar moving forward as $1.37 cheese may be too cheap with an 83 or 85 handle on the US dollar index (dollar index is at 92.80 this morning).


The midpoint Central dry whey mostly price was down 0.25 cents from the previous week, at 23.25 cents. The midpoint Western dry whey mostly price was 23.63 cents per pound, down 0.37 cents from the previous week.. Dairy Market News reports the sweet whey powder price for April 18 – 29 in Western and Eastern Europe at 27.22 cents per pound, unchanged from the previous period.

For the week ending April 16, dairy cow slaughter under federal inspection was up 0.6%, at 54,600 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.5% lower than 2015 levels, with 943,700 head slaughtered.

We look for a lower opening to Class III and Cheese and steady opening for Dry Whey.

Spot Session Results












UP ¼





















UP 6




Class IV, NFDM & Butter

While the rest of the dairy complex zigged Friday, the butter market zagged. Translation: butter futures went up. Again.

133 butter contracts traded hands and 2016 prices finished between unchanged and 4 cents higher with the exception of June, which rose by 4.97 cents – just a tick off limit up. What is going on here? We continue to see budget-setting in the low $2.00 range and that story has just not changed yet. But before we throw up our hands and tell you we’re going back to $2.20 or $2.25, let’s keep some perspective. Even though futures were up sharply on Friday, price action over the past several trading sessions appear to be consolidating between $2.10 and $2.15 (give or take a few cents depending on the month). In other words, the price action is really more sideways in a fairly large trading range. We don’t expect another day like Friday today. 
The fundamentals suggest there is milk and cream sloshing around in the country and that will likely keep a lid on butter prices even if we find buyers in the low-$2.00 through the month of May. Ice cream production and demand for cream will really kick up later this month at earliest (more likely in June), but right now we look to be in as good a place as any to absorb fresh ice cream demand.

375 NFDM contracts changed hands Friday as futures prices sold off along with spot, which fell 2.00 cents to 75.50 on 5 trades. The story is similar this morning as futures traded slightly lower overnight. While the mid-70 cent range seems to be some area of market equilibrium for powder right now, the chart below has commercial buyers’ attention. This is a chart of the front month (second month out) continuation contract. While it doesn’t draw attention to 2017 - where we see the most end users lacking coverage - it gets the point across. Prices continue to be very low relative to recent history. The chart won’t change the mostly bearish powder fundamentals today, but it offers some perspective for those buyers who have been lulled to sleep by the negative powder rhetoric.


We look for a mixed opening for Class IV, NFDM and Butter.


Drier forecasts for Argentina (the bulk of the country will be dry for 10+ days) and gentle spring rains over parts of the US Corn Belt this weekend are weighing on the grain markets to start the week. The grain market even shrugged off a weaker dollar barely pushing higher to close out last week and traded lower overnight. We’re looking for a good corn planting number this afternoon and big progress this week as weather looks good for planting.
One of the biggest drivers of market action in April was the speculative funds. Those funds flipped from a large net short position (short 175k corn contracts) to a net long position (long 75k contracts) over the past three weeks. The price of new crop corn gained about 25 cents in the same time period. We expect corn and soybean markets to focus on the bearish reality (good planting, better weather) to start the week, but remained concerned about the impact of currency valuations on the price of grains going forward.

We look for grains to open lower across the board.

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