Morning Dairy Comments, 06/09/2016

Thursday, June 09, 2016


General Market News

· USD firm this morning re-cooping yesterday’s losses

· Alphabet explores beaming high speed internet into homes

· Oil hit fresh 2016 highs yesterday above $51 per barrel

· German exports down sharply sitting unchanged year over year for April vs. being up 1.9% for March

· US moves aircraft carrier to Mediterranean, sends message to Russians

There is still time to register for our 13th Annual Dairy Outlook Conference in Chicago on June 16th. Please see the agenda at the following link. http://goo.gl/M8iDnO

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Class III, Cheese & Whey

Class III, Cheese and Whey futures moved sharply higher yesterday adding to a rally that started back on June 2nd. The rally has market participants searching for reasons why. Producers, end users, and speculators alike seem more comfortable in a bearish market where they are able to rationalize the move lower; we have too much milk, inventories are too high, price signals must be sent to slow production, and every other fundamentally bearish reason circling about. But for now the bear is stilled as the bull makes it charge.

From a futures standpoint, the recent increase in Class III and Cheese prices has yet to stretch a week’s length. However, spot cheese has been creeping up since making lows in early May. Spot Cheese prices have been led by barrels, causing the block/barrel spread to become inversed for almost a month. A barrel lead spot market suggests strong demand for processed cheese perhaps demand is better than anticipated for grilling season.

Commodities as a whole have been trending higher the last couple months, and we wrote not too long ago that dairy may have its day soon. It certainly seems fund activity has increased in dairy but as we know a bull must be fed every day, proven out by the significant pullback seen Tuesday. A close eye must be kept on both the grain markets as well as the spot session as they look to be the key drivers.

We look for Class III and Cheese to open sharply higher with whey steady to slightly higher

Class IV, NFDM & Butter

With continued reports of discounted milk in the Midwest/Northeast, and production concerns in the West, it is surprising that the Class III complex has been the bull as of late. Yesterday, we saw a lower spot market for NFDM, followed by higher futures prices. This likely due to some sympathy buying spilling over from the aforementioned class III activity. We hear mixed reports from the marketplace but it seems despite plentiful inventories fresh powder is difficult to come by. Sliding milk production in CA in part driven by a recent streak of hot temperatures is partly to blame but we are perplexed by the lack of fresh product available from the upper Midwest and NE as one would surmise strong NFDM and butter production given the strength seen recently from the cheese markets. 

NDPSR reported only 2.09 million lbs. of butter sold last week, the lowest level since the week ending Nov 28th, 2015. Back then prices were in the high $2.00/lbs. The low NDPSR volume coincides with the USDA’s reports of setbacks in butter production in the Midwest, seasonal production decline in the west, and shortness of cream in the Northeast. Alone these factors can fuel a rally anytime of the year. To have all three regions experience some type of production difficultly before a potentially hot dry summer is another story.

We look for Butter to open higher and NFDM to open lower. 

Grains

Corn and Soybeans continued their climb higher yesterday mostly due to mixed weather reports showing some dryness and warmer temps for the coming week.  The volatility does not look to subside anytime soon, and we more than likely have not yet peaked. Though if you were to build such a case now might be the perfect time, with anticipated rains coming the next two days and a report due out on Friday. If searching for fundamental answers in the dairy market makes your head spin, soybeans can make you downright insane. During its now 3 month rally, every time it was thought to have run out of steam some bullish news would hit the market, sending prices higher. As this was happening funds and managed money got into the market, and remain by continuously adding to their net long position. Funds were thought to be buyers yesterday making their net position long 190,000 and 234,000 contracts of corn and soybeans respectively. Weather of course is still a factor, but the amount of premium built into the current market seems very overpriced assuming we don’t see any weather issues.  


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