Morning Dairy Comments, 05/25/2016

Wednesday, May 25, 2016


General Market News

· Fonterra to announce forecasts for next season by end of week  http://goo.gl/8bs6jk

· Yogurt market can hit $1 bln by 2021 in India http://goo.gl/bqmJlO

· China wants to set prices for the world’s commodities http://goo.gl/wLHmXe

· WHO slams industry over breast milk substitutes http://goo.gl/6t0Sbb

· Monsato rejects Bayer’s takeover offer, but remains open to further talks http://goo.gl/fgfqJc

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Class III, Cheese & Dry Whey

The class III and cheese markets are dealing with plenty of milk and cheese and a pretty good supply of bearish news, but what its lacking is a little harmony here lately. After most phone calls we have, the expectation is generally prices should continue to move lower. Yet some among us that were short these markets covered their positions yesterday pushing prices higher by the end of the day as both blocks and barrels moved higher yesterday (Open interest fell modestly for class III and was unchanged for cheese).
Why would the market not be in sync with the news? The short-answer is that the news is known, has been baked into prices,  and the market is now focusing on other considerations.  There  was a slight increase in chatter of buyers “taking a few extra loads” over the past few weeks when the spot prices were closer to $1.30 or lower. That may have helped stabilize the price, but what is moving it higher?
Dry whey has been slowly moving higher as proteins continue to be well supported around current levels.  Weather is warming up.  Temperature gauges will push north of 80 degrees for most of the Midwest for the first time this year this week and it’s bringing with it higher humidity levels. While this weather likely won’t have a material impact on milk production, it is a change - and that can begin to changes people’s perceptions.  The same may be true in Europe as well.
Although all of the main EU milk producers, with the exception of France and the UK saw sharp increases in milk production compared with last year while French and UK collections were flat to slightly lower as poor grass growth and grazing conditions took their toll on milk production. According to comments from our office in Dublin, “Latest data released showed UK milk collections fell off significantly in April. April milk collections are expected to total 1.29 million tonnes, a reduction of -3.2% compared with April 2015. Adding this Eurostat’s collection for January to March would leave cumulative collections for the year to the end of April at 5.04 million tonnes, 0.9% ahead of the same period last year.”

On the other side of the coin, domestic demand continues to be strong as grilling season heats up. Promotional activity is seen with many 2 for $5 (8 oz. chunks) and LTO deals ahead of the Memorial Day holiday.  Given current stockpiles none of the above is game-changing in our opinion, but is it foreshadowing a more balanced market in the $1.40’s at all? Sure seems to be the case.

And if you needed one more reason for a little firming action here lately, take a minute to watch this clip with your coffee: https://www.youtube.com/watch?v=37-pPk0bJ-o

We look for Class III to open steady to 10 cents lower, Cheese steady to a penny lower with Dry Whey to open steady.

Spot Session Results

Type

Trades

Settlement

Change

Bid

Offer

CHEESE

BLOCKS

5

$1.3400

UP 2

0

0

 

BARRELS

0

$1.3925

UP 3 ¼

1

0

NFDM

GRADE A

2

$0.7825

DOWN 1 ¾

2

1

BUTTER

GRADE AA

1

$2.0800

DOWN 1

1

1

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Class IV, NFDM & Butter

NFDM futures values eroded throughout the day, with the selling pressures spurred on by the 1.75 cent decline tallied during the spot session, to end the trading session with the June through December 2016 contract 0.500 to 1.500 cents lower as just over 50 contracts changed hands.  The second half pack, depicted in the chart below, highlights the range bound trading pattern of the NFDM market.  Throughout the month of May this pack has established a series of higher lows, stair-stepping its way towards the persistent resistance hovering around 95.000 cent level.  This resistance level has held since early March and should once again pose a formidable obstacle to overcome, ultimately rebuffing any further advances while pushing the pack average back into support near the 90.000 cent level.  The CWAP for the week May 20th gained 3.37 cents (4.6%) over the week prior to post at $0.7643 while still 20% lower than during the same period last year.  Sales for the week were estimated at 7,591,388 pounds, down 50.3% week over week.

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Butter futures values held mostly stable at the outset of the trading day before the combination of the results of the Cold Storage Report combined with the penny decline registered during the spot session led to contracts settling between unchanged and 2.475 cents lower in the June through December months.  The light trading volume for the day is reflective of the reluctance of the buy side interests to step up at what is now considered premium price levels amidst the significant volume of product held in storage across the nation.  While the possibility of a noteworthy portion of this volume may already be spoken for, the idea of stepping up and securing butter at these current price points is a daunting decision to make with global players anxious to capitalize on our domestic price discrepancy to international markets through imports teamed with the idea that many buyers have already addressed near term needs.  Butter values should continue to trend lower, though the ever-present memory still fresh in buyers’ minds of near $3.00 prices will most likely trigger the layering in of purchases as prices approach the $2.10 mark in the second half months.

We look for Butter to open mixed, NFDM to open weaker.

Grains

The grain markets experienced a volatile trading session in which the selling pressure of the overnight session was thwarted as corn futures touched their highest levels in a month and the soybeans erased double digit losses to post double digit gains, however short lived, before all markets cascaded lower into the close of the day’s trade.  The July soybean futures finished the day 3.75 cents lower to $10.54 ¾ while the November contract dipped 7.00 cents lower to $10.29 ¼ as funds were attributed with selling 8,000 contracts on the day.  The soybeans cascaded lower during the overnight session after Chinese soybean and soybean meal values plummeted overnight before U.S. market participants swiftly pushed both markets sharply higher, aided in part by rumors of commercial meal buying in the nearby months coupled with the lagging planting rates in certain states.  

The wheat market was not immune to the directional pull of the soybean and corn markets before settling for the day with the July contract up 2.00 cents to $4.64 while the December contract  added 2.25 cents to $4.93 ¼.  The strength of the wheat market seems a bit suspect as winter wheat conditions were reported steady on Monday at 62% good/excellent while the spring wheat planting rate is running 18% ahead of the 77% average for this time of year with significantly better crop conditions than normal.  Funds were credited with buying 3,000 contracts in an effort to cut back their short positions as some concerns relating to the protein content of the winter wheat crop have surfaced.

The corn market caught its early strength on concerns regarding the future planting progress in several states as extensive rains have been called for the cross the Corn Belt over the next one to two weeks.  While these soaking rains coupled with above normal temperatures are ideal for crops already in the ground, the final deadline for corn plantings eligible for crop insurance is swiftly approaching, June 5th for the highest at risk areas, before potential insurance benefits are reduced.  In the two graphs below is depicted the total estimated acres that remain unplanted on a state by state basis as well as the number of corn bushels that are at risk based on the 30 year trend of yields.  If the approaching storms prevent significant planting progress to be made then producers will look to allocate their remaining acreage to other crops, namely soybeans.

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We look for Corn and wheat to open modestly higher, soybeans 6-10 cents higher.

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