Morning Dairy Comments, 05/18/2016

Wednesday, May 18, 2016

General Market News

· Stocks sag as U.S. interest rate rise expectations revive

· New Zealand dairy farm prices fell 24% in the last three months ending April 30th

· McDonald’s among 11 of world’s largest food and beverage companies in trans fats phase out pledge

· KKR among bidders for UAE’s National Food Products Co.

· U.S. extends overtime pay to 4.2 million salaried workers



Class III & Cheese

Class III futures volume dropped yesterday (just 658 contracts) along with open interest (down 31 contracts) on a mostly mixed trade. Cheese futures, too, finished mixed in a rather tight trading range as over 600 contracts traded largely evenly distributed thru December 2017. The bright spot yesterday was option volume with over 1,100 class III and nearly 2,000 cheese options changing hands.

Indecision may or may not be the problem. Mixed futures trading and heavy option activity indicates a level of indecision or uncertainty around current price levels. On one hand, cheese and milk are abundant, especially since Mother Nature continues to offer up near perfect milking conditions in the U.S. this week.
On the other hand, there is a demand response to price action for cheese underway. US cheese is becoming competitive again on the world stage. 
Although much 2016 cheese demand was pulled forward in the form of both physical and financial hedges during the past 4 months, we’re hearing bits and pieces of fresh buy side interest around this $1.30 mark. And this seems to be true of both domestic and international buyers.

Let’s not get ahead of ourselves. It’s not like some floodgate of new demand was opened and suddenly the cheese overhang in the country will vanish. But the pulse of the market is beating again and that ought to stabilize spot prices around current levels in the near-term.
After a relatively benign GDT auction event yesterday (The GDT Trade Weighted Index increased by 2.6%, and an average winning price of $2,283. Cheddar fell 0.8% to $2,693 or $1.2215 all contracts), the U.S. markets will be focused on tomorrow’s milk production report. We’re looking for an April increase of 1.8% YoY, which is largely sponsored by increases in milk-per-cow. We also didn’t see quite the culling we thought we would back in April, so we expect some growth in overall cow numbers as well (take a look at our full estimates on the next page). Generally we see a little uptick in volume and price heading into a milk production report, but so far the markets are lower rather than higher this morning.

USDA-ERS economists raised their milk production estimate from the previous month,
according to the most recent Livestock, Dairy, and Poultry Outlook report released this week. Milk cow and milk per cow estimates were higher in this month’s report. Projections for domestic commercial use and exports were also mostly higher. For 2016, USDA expects the Class III milk price to average $13.40/cwt., $2.40 below 2015’s average, and the 2016 Class IV milk price to come in at $12.95/cwt., $1.40 lower than the previous year. With the Class III and IV milk prices lower, 2016’s estimated all-milk price of $14.85 is projected to be $2.24 lower than in 2015.

Looking at 2017, USDA places the milk herd at 9.320 million head, steady with 2016. Milk per cow at 23,095 lbs. is 1.04% higher than 2016’s level. The milk per cow increase combines with the steady cow numbers to push 2017 milk production 1.04% higher than 2016 at 215.2 billion pounds.

We look for Class III to open 1- 10 cents lower, Cheese steady to 1.00 cent lower with Dry Whey to open steady.


Spot Session Results


















UP 2







DOWN 3      












Class IV, NFDM & Butter

Class IV futures registered a total of 34 trades yesterday within the August through December 2016 contracts, with a majority of this trading volume a result of trading activity within the Class III/IV spread.  The contracts settled between -5 and +21 cents.  The Class III/IV spread for the nearby months (June and July) has extended to negative $1.00 plus, with the Class III price being lower than its Class IV counterpart.  As highlighted within the below chart, the spread has typically remained well below $1.00 either way, yet as the resilience of the butter and resurgence of the NFDM futures have protected the Class IV futures from the steep price declines experienced by the Class III market this hedging instrument is again providing traders with an opportunity to capitalize on the price discrepancy.  These outlier type moves within the spread have typically been relatively short lived and should continue to garner attention in the near term.   


The butter market maintained its firm price action of the early portion of the trading session as the results of the GDT auction provided momentum to the activity of the buy side interests leading the futures to settle between down 0.075 and up 1.500 cents on the day.  Despite the rise in the GDT values of the butter related products, U.S. values still hold a stark price premium.  As such, any thoughts to a continuation of strength based on the GDT auction alone should be tempered.  Instead it will be the spot session that guides today’s price action.

NFDM futures began the day stronger as contracts traded as much as nearly 2.00 cents higher prior to the GDT auction.  These gains failed to hold as the results of the GDT auction coupled with the 3.00 cent decline posted during the spot session drove the futures contracts into the red, settling for the day unchanged to 2.600 cents lower.

The CWAP released yesterday for the week ending May 13th posted with a week over week gain of just 0.09 cents to 73.06, a price 24.3% lower than during the same week last year.  Weekly sales were estimated to have reached 15,274,342 pounds, down 8.4% from the week prior. 

We look for Butter to open steady and NFDM to open 0.500 to 2.000 cents lower.


The grain complex was pulled higher by the resurgence of buy side interests into the soybean/soybean meal markets as talk of Brazil shedding another 1 MMT of production due to late season dryness and disappointing yields ignited the rally.  If the projected losses within the South American soybean crop come to fruition a significant volume of export demand would be shifted to the U.S. providing enough motivation to drive prices in the near term.  Funds were credited with adding 11,000 soybean and 6,000 soybean meal contracts on the day.

Corn futures rallied from the outset of the trading seminar, tallying minimal gains in sympathy to the strength of the soybean market.  Corn plantings are estimated to be 75% completed, but the ECB and WCB could see a series of rain events that will continue to hamper any additional progress.  If these weather fronts continue to delay plantings in these areas there is the potential for up to 2.7 million acres to be shifted to soybeans, and if plantings are brought to a halt all together up to 9.7 million acres could be transferred to soybean production.  In Brazil a majority of the corn crop regions are still suffering from dry, hot conditions that could further inhibit crop yields that would in turn draw export interests from South America to U.S. corn.  Funds were estimated to have purchased 9,000 throughout the trading session.

The wheat market joined in on the soybean and corn rally despite weather models projecting a series of rains across the winter wheat areas over the next five days.  These late season rains will boost yields while the spring wheat crop conditions remain attractive with Kansas, Oklahoma and Texas wheat regions looking at potentially significantly elevated yields.  Funds were credited with reducing their net short position by a total of 5,000 contracts.

We look for Corn to open 1-2 lower, Soybeans down 5-8 with the wheat down 1-3 cents.

5-Day Precipitation Forecast Map


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