Morning Dairy Comments, 06/20/2016

Monday, June 20, 2016

General Market News

· Fonterra chairman expects dairy market recovery in 6-12 months

· Stock futures sharply higher as Brexit fears subside

· U.S. shale oil producers eyeing growth with oil near $50

· Dairy farmers say safety net on milk price is not helping



Class III, Cheese & Whey

Blocks were 2 cents lower to $1.51 ½ on no trades while barrels were down a ½ to $1.54 ½ on 7 trades. Class III and cheese futures traded slightly lower on a mixed trading day. Looking at the July-Dec Cheese futures chart the market is starting to consolidate in the mid $1.60’s. Last week the pack average traded as high as $1.75 as the market was in panic mode. You have to feed a bull market, and last week we saw signs of exhaustion.

One topic regular readers are well aware of is the strength in domestic demand can absorb higher cheese supplies. Retail sales have been reported as strong over the last several months, likely aided by promotional activities. In the past year lower prices for energy have aided consumers to travel more. As seen in the chart below, during the years of 08-12 people didn’t increase their traveling due to lingering recessionary impacts. Although in the past 2 years people are driving 2-3% more. According to the National Restaurant Assoc. about 19% of quick service restaurant sales are directly related to travel and tourism.


Tomorrow’s US milk production report will release at 2pm CT. We are looking for a 1% increase for the 23 state numbers. We are still seeing the Midwest cranking out milk at a good clip while California will continue to see declines. 

Weather models continue to push daytime temps north of 100 for California throughout the Southwest U.S (nighttime between ~57-73 degrees). The upper Midwest too is expected to be warm for periods over the next two weeks. Weather is an issue. Good demand for dairy products at large is an issue. But overall the market has likely priced in a good deal of the initial hot weather this summer and sentiment remains rather skeptical of further pricing gains in the near-term.

July-Dec Cheese Average:


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


Class IV, NFDM & Butter

The spot NFDM market settled up a ½ cent to 84 ¼ with 5 bids left standing, while there were 5 offers at 87 cents. The NFDM futures grinded higher as the market continues debating tighter available stocks caused by the EU’s buying program. Last week Dutch SMP prices increased €60/mt to €1,740, German prices up €15 to €1,725, and French prices unchanged at €1,680. Year to date EU exports of SMP are at 227,788mt, compared to 2015’s pace of 248,529mt. The difference can be explained by higher the higher contributions into intervention by key exporters such as Ireland, Germany, France, and The Netherlands.


While NFDM seems to be somewhat balanced in the mid-80 cent range for now, butter had a rather good two-sided trade during spot. 17 loads traded between $2.3425 and $2.38 before settling at $2.3675. The last time we traded more spot butter in a single session was actually not that long ago. On April 6 of this year 21 loads traded. The interesting feature for Friday’s trade is that the sellers seem to have butter and are ready, willing and able to sell it between $2.30 and $2.40). Last year’s advance to $2.90 didn’t really get underway until August (when stocks were some 80-90 million lbs. lighter than they are today).  There are a lot of reasons we could stay at current levels longer (including composition of inventories, weather, demand, etc.), but a renewed interest to sell a mid-$2.00 butter price seems to be alive and well.


We will get another look at Friday’s May cold storage report where we could see stocks rivaling 2013’s levels between 300-325 mil pounds. It seems each report the market continues to brush off the bearish numbers as demand has increased at the cost of other substitutes such as margarine. Current cream multiples out west are not attractive so churn operators will side on using internal cream supplies vs selling into the spot cream market. The chart below shows that milkfat percentages this year are higher than last year, and tracking on line with the high fat levels in 2013.  


We look for Butter and Class IV to open mixed and NFDM to open steady to lower.  


The grain markets traded sharply higher on Friday as “flash drought” talk made its way around trading circles. Dec corn was up 13 cents while Nov beans were up 29 cents adding some weather risk premium.  The National Drought Mitigation Center climatologist is acknowledging the risk of drought development over the next 2-4 weeks. 24% of the Corn Belt is abnormally dry vs 15% the prior week. The National Weather Service forecasts are looking for above average temps for almost the entire US for July-Sep.

The USDA announced sales of 129kmt of soybeans to China, 66k old and 63k new crop. Another 395k to unknown destinations, 263k was old and 132k new crop. US soybean exporters remain competitive from Aug forward. Chinese buyers are becoming nervous looking at our weather forecasts. Brazilian soybean exports have been running at a record clip as South America is dealing with a smaller crop. Conab, Brazil's national crop agency,  is pointing towards a 2015-2016 Brazil soybean ending stocks of 450kmt which represents about 4 days of domestic demand.

Friday’s CFTC report showed the funds added 44,829 long contracts to their net 268,412 long position in corn. The market underestimated the funds length by 28,000 contacts as of last Tuesday. They trimmed a modest 2,873 contracts from their 178,226 long position in soybeans. The market has been overestimating the fund length as of last Tuesday by about 26,000 contracts. This may be indicating profit taking in soybeans and the willingness to shift some bets into corn.


We look for Corn to open 6-8 lower, Soybeans 13-17 lower and Wheat 4-6 lower.

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