Morning Dairy Comments, 05/05/2016

Thursday, May 05, 2016


General Market News

· Fonterra cuts milk prices for Australian farmer suppliers http://goo.gl/4YPfiO

· Transatlantic trade deal could have ‘severe impact’ on EU beef http://goo.gl/nckWgU

· Crude oil continues rally as Canadian fires and Libya violence threaten supply http://goo.gl/ems5CT

· World food prices edge up in April though 10% lower year over year http://goo.gl/1Hs2M9

· McDonald’s shares hit record high yesterday thanks in part to the all-day breakfast  http://goo.gl/lQmnTZ

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Class III & Cheese

Class III and cheese futures markets have put in bottom. It may be only a short-term bottom, but to us it’s a bottom. Spot prices continue to carve out price lows not seen in over five years but the futures market largely ignored that weakness. Initially futures acquiesced to cash market weakness, but found support and finished mixed on supersized trading volume.

2,669 class III and 1,029 cheese contracts traded hands as the market weighs the immediate bearish fundamental realities with a more unknown future. The 64-thousand-dollar-question today seems to focus on weather.

It seems to be one thing to push cheese lower in January or February, but to make the case for extended price weakness in (or rather after) May is another. Yesterday Accuweather.com released an article (http://goo.gl/tr6viJ) forecasting the 2016 US summer weather that, among other things, highlights a hot, dry summer for the Eastern United States. Hot, dry forecasts – particularly in what has become the bread-basket of US milk production over the past few years – is a caution flag for even the most bearish among us.
Most will write it off as they say, “summer happens every year.” And we won’t debate that. But we will point out that futures markets are trading future possibilities/uncertainties. When you look at weather considerations and add in currency considerations (US dollar weakness), we’re starting to see a few reasons why there may be more immediate support to the current market than would meet the eye.

We’ve been long believers that dairy farm profit margin compression had to get worse before prices get better. And maybe that is still the case, but we’re open to the possibility we’re wrong on that. It looks more like the US could potentially lose more overall production from a one-two punch of hot weather AND ration changes courtesy of higher feed costs than it can by skyrocketing cull rates.

Weather and the dollar don’t change the spot market weakness of late. The spot market is still vulnerable to weakness and that could keep a lid on futures prices in the short-term. But we see the current, 2016 futures market as in the process of putting in a complicated bottom. 

New Zealand cow slaughter statistics (from our office in Dublin)

The number of cows slaughtered in New Zealand in week 27 of the season (W/E Apr 9th) soared to 48,950 head, up 7,035 head on the previous week, and accounting for the largest weekly total for the current season. As we move towards the end of the NZ milk production season (June-May) we’re now starting to see a pickup in weekly slaughter numbers, particularly on the SI, where better rainfall kept grass growth well up on last year. 

NI slaughters accounted for 28,972 head of the total number slaughtered while the SI accounted for 20,278, the largest weekly total for SI cow slaughters over the past two seasons. Last year was the first time since 2005 that the NZ dairy herd contracted and with below cost of production payout forecast for this season along with what looks like will be a weak forecast for next season - it looks like this year will see further contraction.

We look for a mostly higher opening for Class III, Cheese and steady opening for Dry Whey.

April Announced Federal Order Prices:

Class III: $13.63
Class IV: $12.68
Butter:   $2.0192
NFDM:   $0.7307

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

1

$1.3250

DOWN 1 ½ 

0

1

 

BARRELS

2

$1.3525

DOWN 1 ¾

0

1

NFDM

GRADE A

0

$0.7550

UP ½    

1

3

BUTTER

GRADE AA

0

$2.0300

UP ½   

1

0

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Class IV, NFDM & Butter

Butter futures moved higher yesterday as the market consolidates the sharp declines of late. Spot butter was also bid up ½ cent and didn’t trade. We don’t see much of an argument to have a repeat of firming prices for butter again today. Imports are up sharply, cream is widely available ahead of ice cream season and the market just doesn’t seem to have much of a reason to build in more premium than what is currently built into the forward curve. Buyers want to own butter and have been setting budgets around the $2.00 level and that will likely continue to be a supportive feature in the short-term.

NFDM futures pared some of their early losses to finish mixed, but mostly lower at settlement yesterday. 340 contracts changed hands as traders weigh the firming spot market against a global supply situation that is still viewed as quite bearish for powder.  Buy side interests seem willing to address only immediate needs as the forward curve in the futures market appears to hold too much premium to attract long-term positions. While there is little worry on the part of buyers today – and we think that can continue for a while yet – we are having more conversations about locking up longer-term contracts into 2017.

We look for a NFDM, Butter and Class IV to open slightly lower.

Grains

Corn futures slipped lower into the close yesterday as weather forecasts provide farmers with upcoming opportunities to continue planting while weekly ethanol production declined while stocks increased.  Ethanol stocks sit now near the highs established in 2012 as market participants await the announcement of the 2017 mandate within the next 30 days as domestic demand has slumped. Funds were credited with selling 9,000 contracts on the day.  Soybean contracts were unable to hold on to a large portion of their early session gains as beneficial weather in South America is aided the harvest rate.  South American values are still below those of the U.S., diminishing prospects for export demand.  Wheat futures rallied early only to succumb to bearish sentiments as crop tours across the Southern Plains are reporting good to exceptional yield estimates.  HRW states are seeing reports of yields that could be 10-30% better than last year. 

We look for Corn, Soybeans and Wheat to open higher this morning.

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