Morning Dairy Comments, 06/22/2016

Wednesday, June 22, 2016

General Market News

· Brexit vote to come tomorrow, final results expected Friday morning

· Corn limits expanded to 40 cents after limit down close

· USD, up yesterday, down this morning, choppy ahead of Brexit vote

· China’s dairy producers still need to regain public trust



Class III, Cheese & Whey

Class III and cheese futures spent Tuesday mostly lower but finished mixed ahead of the May Milk Production report released yesterday afternoon. The nearby contracts of July thru September showed the most weakness yesterday as the block price dropped $0.25 to finish at $1.5125. Barrels remained unchanged at $1.5450 with no trades. The modest weakness in spot drove the nearby contracts to fall precipitously intraday. At one point the August class III contract traded down 50 cents to $15.70 before recovering to about 20 lower amid cooler heads and a firming dry whey market.

Looking a little closer at yesterday’s activity, we see that over 1,600 class III contracts changed hands and open interest declined by 139 contracts. 513 cheese contracts traded and open interest was up 34. This week’s trade seems to be dominated by a perplexing dynamic in which supply/demand discussions suggest prices ought to come down from current levels, but trading action is buying the dips. Eventually, the “buy the dip” mentality may give way to more weakness for the nearby contracts should the spot market continue on its steady to lower path over the next few days, but for today such action is still likely underpinning the market.

Also underpinning the market is dry whey prices, which are supported by discussions and data that show China is importing more of the protein (likely for animal feed). Europe’s supply of whey has been tightening for a little while now supporting prices, which are at a premium to the US. Given that dynamic, it makes sense for Chinese to focus on US whey. 

Turning to Milk Production, we called the May Milk Production report “neutral” versus expectations. Milk per cow in 23 states was above 2,000 lbs. for first time ever. U.S. milk per cow almost was there as well at 1,999 lbs. Number of 23 states increasing production over 2015 held steady from April at 16 states.

The 23 state breakdowns were interesting this month as there looks to be very little regional influence on milk production losses. Utah is down 4.6%, New Mexico down 3.8%, Virginia down 3.8%, Florida down 2.9%, California down 2.8% and Illinois down 0.6%. Most of the decline in milk production for these states can be tracked to a lower number of cows being in these respective states. The significant gains continue to be mostly in the upper Midwest states which benefitted from steady to higher cow numbers and good milk per cow results as well. South Dakota +9.5% led the way, Michigan +6.9%, Wisconsin +4.2%, Iowa +2.3% and Minnesota +2.2% all showed significant growth. New York +4.9% and Colorado +4.1% were the semi-outliers with Arizona also up 2.3%..

Overall it’s hard to bet against the U.S. dairy producer who has consistently produced record volumes of milk so far this year. But prices can go up – as they have so far in June – because simply looking at milk production by itself ignores demand for that milk (which is running better than 1.2%) and available processing capacity. We wouldn’t expect to see much in the way of a price reaction to this report as given the recent run up, it’s fair to say the lower revision for April and the steady cow numbers are already priced in


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



Class IV, NFDM & Butter

The NFDM quietly continues to push higher as the spot call brought with it a fresh 2016 high price print yesterday. Spot NFDM is now at 88 cents up 3 cents from last Tuesday and up 7 cents since June 1. CWAP came in slightly lower (-0.4%) last week at $0.7689.
There is plenty of powder out there but there is also a really nice two-sided trade going on in spot. Futures seem to have a firm bias although we can’t rule out modest pullbacks in the near-term. Overall, the real risk to the powder market is bearish bias. If prices continue to firm as we move into July at some point we may hit a tipping point where the market “shorts” run for the hills. If and when that happens, the NFDM trade will be less concerned with current supplies and more concerned with a material lack of offers above the market.

Of all dairy products, butter seems to be losing the most steam here recently. A good two-sided spot trade in the mid-$2.30s has given way to a quieter market with an unfilled offer left on the board yesterday. Futures showed sharp losses yesterday and growing open interest as new sellers have returned. We expect more weakness on the spot butter market heading into and/or following Friday’s May Cold Storage report.

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


They say prices take the stairs up and the elevator shaft down and that’s been the look of the corn market so far this week. July and December corn finished limit down or 25 cents lower yesterday (September down 24 ½) and trading limits are expanded from 25 cents to 40 cents for today’s trading session. As we said yesterday, the grain complex is in the midst of a weather market and the immediate weather has been very beneficial for growing corn. Longer-term forecasts remain a better bet for market bulls as “too dry” is still a concern for July and August. But for today we think the driving force for grains has been (1) good weather, (2) uncertainty around Brexit vote tomorrow leading some funds to take money off the table, and (3) large option open interest considerations for the July options, which expire this Friday. Below is a note from our update yesterday:

Unlike dairy products, grain options expire weeks before the futures. This often leads to increased volatility as the futures market will often “target” a big option number – a strike price that has a larger amount of open interest for put options, call options or both.  For July corn options, that strike is the $4.00 calls and puts (there are some strikes with larger put option open interest below the $4.00 level, but we think $4.00 is the target). For July Soybeans, that strike price is $11.00.
No matter how the weather unfolds over the next few days, keep in mind that these big options strike levels often act as a magnet for the futures market. Oh and if the market does make a move towards the $4.00 level for July corn and the $11.00 level for July soybeans, you can bet the news will show more favorable weather patterns. But now you’ll know there may just be more to it than weather.

The charts below show current state by state corn and soybean condition ratings compared to last year, following continued strong ratings this week. Ohio is the main laggard in corn, though that number is pretty misleading since OH lost a whopping 19% g/ex (from 80% to 61%) on 6/22/15. The I-states are the only other major production states behind last year’s pace, though again, IL and IN will jump ahead of LY next week due to comparable-week declines last season.


We look for Corn to open 2-4 lower, Soybeans to open steady to 2 lower and Wheat to open mixed.

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