Morning Dairy Comments, 05/11/2016

Wednesday, May 11, 2016


General Market News

· USD closes higher for 6th straight session

· Disney & Staples both disappoint with earnings pushing equities lower

· Kuwait plans to produce a record 4 million barrels per day of crude oil

· Number of NZ dairy cows lower for the first time in 9 years

· New Zealand’s banking sector faces risks with falling housing costs and dairy price slump

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Class III & Cheese

Spot cheese was quiet yesterday with one offer above the market in blocks, and barrels were bid up 1 cent to $1.28 with no offers out there. This leaves the block-barrel spread at -1.75 cents. Class III futures responded by settling lower across the board.

The cheese market continues to focus on the obvious supply fundamentals. Imports continue at a strong pace, the heavy milk production in the Midwest (+5% in Wisconsin), and 11% higher total cheese stocks. Although cheese continues to move, and there are reports some cheese companies in the Midwest are comfortable with their inventory positions. Retail demand has been reported to be good over the past quarter. Food service demand has also been strong and that has been translating into higher cheese disappearance numbers (see chart below). The high cheese inventories may not be as burdensome when compared to the higher domestic demand. This is very stale info, but a good example of domestic demand would be Dairy Management Inc’s partnership between QSR’s. Between Jan 2014 and July 2015 there was about 400 mil lbs more cheese sold to McDonald’s, Dominoes, Pizza Hut, and Taco Bell. As commented in Monday’s report, restaurant sales continue strong, and many restaurants are offering competitive promotion. The tailwinds behind a healthier economy, and more traveling will underpin demand this summer. With spot cheese at $1.30 and a softer dollar there’s an argument exports will start recovering. With some of these facts in mind it may be that spot cheese prices are too low coming into the demand season.  We would expect the spot market to attempt to find a bottom in the coming 2 to 3 weeks.

Dry whey futures were mostly higher as the sentiment is more positive as buyers are comfortable building positions in the mid 20’s. US dry whey exports are down 39% in Q1 although prices are competitive against the EU especially with the weaker dollar.

We look for Class III and Cheese to open mostly higher and Dry Whey to open steady to marginally higher.

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Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

0

$1.2725

UNCH

0

1

 

BARRELS

0

$1.2900

UP 1 

1

0

NFDM

GRADE A

19

$0.7950

DOWN ½     

1

3

BUTTER

GRADE AA

0

$2.0475

UNCH   

1

0

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Class IV, NFDM & Butter

The spot NFDM market showed 19 trades yesterday settling down ½ to 79 ½ cents. Futures were mostly lower. The sentiment continues to be more positive in this market as buyers view the downside risk to owning physical powder is limited. Last night CWAP printed 72.97 cents up nearly 1.5 cents from the prior week. CWAP volumes showed 16.7 mil pounds. See the chart below, it appears volumes so far this year were relatively low as interest outside existing supply contracts was likely limited. The past few week’s volumes could show some inventory clearing transactions, but it also speaks for buyers willing to step in.

Spot butter was unchanged at $2.04 ¾ with one bid left unanswered. Butter futures were mostly lower although still relatively firm. With over 8% more butter produced in March the futures still have not budged too much. The market feels balanced, and will likely stay supported coming into the summer months with ice cream demand pulling cream from the churns. Looking at the spot butter chart below the past 2 years the market has featured high risk premiums seasonally in advance of the demand season.

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We look for class IV to open mixed, with butter slightly higher, NFDM slightly lower.

Grains

Beans and butter have more in common than starting with the letter “B”. Both, at times both seem to defy gravity and climb higher when fundamentals suggest otherwise. Yesterday however, fresh news from the USDA report helped push meal limit higher, and 2016 bean contracts over 50 cents higher. For both 2015/16 and 2016/17 crop years, the USDA reported a lower than anticipated ending stocks number, which rallied the bulls in the grain market. A lot as has been said as of late of funds effect on the grain market. The same can be said today, as funds were thought to have been buyer of 30,000 soybean contacts and 17,000 corn contracts. Ending stocks however are still above last year levels which should keep a lid on pricing and may even see some pull back from gains experienced yesterday.

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We look for corn and wheat to open 1-3 higher, and soybeans to open 3-5 higher.

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