Morning Dairy Comments, 06/14/2016

Tuesday, June 14, 2016


General Market News

· All eyes on Yellen press conference tomorrow

· S & P 500 hits 3 week low yesterday

· Microsoft purchases LinkedIn for $26.2 billion

· Crude oil hits fresh one week low

· VIX spikes by 23% yesterday the largest daily move since early December

· USD sharply higher overnight pushing most commodities into the red

· Yield on Germany’s 10 year turns negative for the first time

· BOE pumps $3.5 billion in cash to lenders ahead of Brexit vote

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Class III, Cheese & Whey

Volatility! That’s the word of late for the class III and cheese markets and Sunday night into Monday was no different. The market shot higher at the open on Sunday and never looked back as the spot market saw blocks and barrels close higher by 4.50 and 2.75 cents respectively. Futures then seemingly had no choice but to go up and given that we went into the spot session with 25 to 40 cent gains it wasn’t long until the nearby months were limit up. July and August both settled up the limit 75 cents while deferred futures saw more modest gains of 27 to 65 cents through the end of 2016 and 5 to 25 cents for 2017. We continue to struggle to find a reasoning for this current rally outside of a bevy of short covering and the massive amount of carry available then driving the spot market higher becomes a self-fulfilling prophecy. In these types of markets you seemingly have two choices, stick your neck out there and try to call a top or let the speeding train run away then be prepared to sell once it looks as though the rally has ended. At the moment that’s a big locomotive coming at us. Likely best to get out of the way and see how far this rally can go.

As you can see in the chart below, day by day we are blowing through resistance and yesterday we eclipsed the 200 day MA. There looks to be very little resistance between here and the highs around ~1.7850. While a rally of that size seems unwarranted based on what we are hearing fundamentally, we certainly couldn’t justify the market being where it is today on fundamentals either.

July to December cheese pack average:

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The dry whey market quietly is finding some support lately and closed steady to 0.750 cents higher on Monday on light volume. 2017 futures have perked up of late likely as buyers look for long term value purchases. At the moment a run nearer 40 doesn’t seem far-fetched at all and that should likely support the nearby months.

Below we include the class III & cheese volume and OI charts. We include these this morning to note how dramatic the decline in open interest has been over the past few weeks. Part of this decline is the May contract coming off the board, but it also appears market participants are not adding positions in earnest during the first two weeks of June. Many seem to be getting out of positions on this rally which goes a long way to explaining how this can be driven higher despite a real lack of any fundamentally supportive news.

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We look for Class III and Cheese to open higher and Dry Whey to open mixed.

 

Class IV, NFDM & Butter

Butter and NFDM prices rallied on Monday after faltering late last week. The spot markets were both higher following cheese to the upside. Butter futures were 2.225 to 5.000 cents higher on Monday despite a rather timid increase on the spot market which was up 1.75 cents. A total of 41 trades took place over half of those in the December contract alone. Futures now sit above the 2.30 mark from July through November and while we’d like to say upside should be limited from here this is the butter market and when things get moving they tend to keep moving. It certainly feels too early for this market to make the seasonal fall price move and that has us wondering if a pullback can occur, however with the upside momentum being seen in other markets it’s tough to identify the catalyst which would allow for that to occur.

NFDM futures settled 0.800 to 3.10 higher on really heavy volume of near 250 trades. Futures climbed above the $1.00 mark for the entire 4th quarter and September is nearly there as well. The spot market will need to get moving to catch up to the July futures which are near 88 cents as of yesterday. The market will be looking to GDT to continue the momentum from each of the two previous auctions and move higher again tomorrow. Anything less than a higher GDT auction would almost certainly be viewed as bearish but the expectation is that GDT will be able to feed off of the recent gains seen in the EU and US. 

We look for NFDM to open firm and Butter to open steady to slightly higher.

Grains

It was an interesting day for the grains as the market turned mostly sideways after the CFTC reports released Friday showed a smaller than anticipated soybean position. We certainly thought it a possibility that the soy market could run a bit given the lack of fund buying that was seen, but that wasn’t the case as beans actually closed down 9.25 cents in July while corn traded firmly closing up 7 cents at 4.30. Informa released their acreage estimates, Corn 92.566 mln ac down 1.035 vs March (USDA), down 810k from their previous estimate; Beans 83.761 mln up 1.525 vs March (USDA), up 755k from their previous estimate; Wheat 50.2 mln, up 605k from the USDA and 170k higher for them. The bean acreage number was viewed as slightly disappointing relative to market expectations. As time passes we get nearer and nearer pollination but also the June acreage & stocks report which really will be the tell-tale indicators for this market likely through the balance of the year. We’re still too early to have a clear indicator of what any of the above will ultimately be but weather will be watched very very closely for the time being.

After the close crop condition rating were released showing soybeans at 74% good/excellent up 2% from the prior week and corn conditions at 75% good\/excellent unchanged from the prior week.

We look for Corn and wheat to open 1 to 3 lower, soybeans down 5 to 10 cents. 


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