Morning Dairy Comments, 07/07/2016

Thursday, July 07, 2016

General Market News

· Danone to acquire WhiteWave in $12.5 billion deal

· CONAB cuts Brazilian corn production for 2015/16 sharply from 76.2 to 69.1 MMT this morning

· Oil prices climb on anticipated U.S. stock drawdown

· ‘Panic’ Brexit Withdrawals Freeze $23 Billion Property Funds

· Putting a South Dakota stamp on national dairy brands

· Growing Asia-Pacific demand drives cautious global dairy growth

· Enrollment is now open for 2017 coverage in the Margin Protection Program. Enrollment ends on September 30



Class III, Cheese & Whey

Class III and cheese futures put the brakes on the downside pressure of the past few days and bounced back to the upside after a relatively tame spot call provided little in the way of direction. By mid-session the early weakness was all but a faded memory as nearby contracts retraced out of the red and went on to trade double digits higher. The pullbacks we’ve seen of late effectively closed the gap between futures pricing and spot valuations, which gave way to the two-sided trade we saw yesterday as the market consolidates near technical points of interest. The tepid volume in yesterday’s action does raise a red flag as far as ideas of bullish continuation are concerned. In other words, yesterday’s move higher looked very sluggish to us. With a spot spread wide enough to drive a truckload of cheese through it at 9 cents, there’s the likelihood that the market is headed for more volatility in the coming sessions, depending on how that situation gets corrected. At current and without some catalyst for movement, futures seem content right where they are and perhaps rightfully so, based on the recent convergence.

If part of the reason for the rally over the past month was predicated on weather fears then look no further than the grain markets to get an idea of where dairy might be headed. Weather markets can be vicious in price action and as fund managers build in risk premium methodically on the way up, they tend to take it right back out a whole lot quicker than they put it in on the way down. So the saying goes, “taking the stairs up and the elevator down”. Is that what we’ll see here in the Class III and cheese markets? Not yet. But we have to ask if the fundamentals have changed materially enough to warrant sustained bullishness on this shortened holiday week.

We’d be remiss not to point out a couple of interesting technical aspects that transpired yesterday. First off, a test of the 200 day moving average (black line) held as support, which provided the springboard for yesterday’s post-spot recovery. Secondly, in the process of testing that level and subsequent rally, Tuesday’s high and low were both taken out, marking a bullish candlestick on the chart. Third, there’s a buy signal forming on the Stochastics (FSTSTO) below, as the red line eclipsed the blue and both were near oversold territory. All things considered, it was a bullish showing which would’ve been a whole lot more compelling if a convincing close over the 20 day moving average (blue line) had occurred. It did not and therefore there’s the real possibility this was just a pause in the recent pullback as a lone bid in the barrels without a push to the upside is likely not enough to keep the bull running. 

August Class III~Daily


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



Class IV, NFDM & Butter

It was as if someone took a blow torch to the butter futures yesterday after soft spot action saw a breach of the $2.30 mark and triggered a wave of selling that pressured nearby contracts limit down with contagion spreading out through 2016 on solid volume. We just recently mentioned that hints of weakness were popping up in that there was a lack of volume being traded with futures at lofty levels. Bull markets need to be fed every day and butter had been in a relative holding pattern of late with stocks deemed adequate in contrast with a market driven by fear and spot pricing stuck in the mid $2.30’s. Follow through selling is not out of the question with a test of the $2.25 level likely in the crosshairs of the coming sessions and futures ripe for retracement.

In contrast, it was a lightly traded session for NFDM as the spot price down ticked and traders feel comfortable with futures where they’re at in relation. A push back towards $0.90 will likely keep a bid in the market but the forward curve is starting to look a bit juicy if traction fails to be found north of that area. SMP did post some further gains in Tuesday’s GDT auction as the index surged 2.6% with contracts 1, 2 and 6 ramping up 8.5%, 3.7% and 3.7%, respectively. A solid showing for contract 1, which could offer some support to NFDM price action moving forward. 

We expect NFDM, Butter and Class IV to open steady/lower.

The Dairy Products report released today contains estimates of May 2016 dairy product production, as well as manufacturer’s end-of-month stocks for dry proteins and lactose. Our interpretation of this report is as follows:


•           Butter—bearish. Butter production declined more than it typically does from April into May coming in well below our expectation for 175.2 million pounds at just 169.9 million pounds. However, this would not speak well for butter demand given how much stocks increased, +9.9% month over month. Certainly we have to take a pause to question just how soft demand may be for butter given the low production number. 

•           Cheese— bearish. May American cheese production was 399.9 million pounds, slightly below our expectation for 409.0 million pounds. Other cheese however came in slightly above our expectation for 594.96 at 598.2 million pounds. As is the case with butter seeing production not meeting expectations doesn’t bode well for the demand side of the equation, American cheese inventories grew 3.2% month over month into May.

•           Nonfat dry milk— slightly bearish.  Sensing a theme here? Once again production came out shy of expectations for 170.6 million pounds at 165.1. Unlike butter and American cheese however stocks were actually lower by 6.6%. April into May tends to be a swing period for stocks so this is a rather sharp decrease. Unfortunately, despite the decline in stocks we’d still term the report slightly bearish due to the fact that we remain well above 2014 levels and some 40 million pounds above the 5 year average. SMP production is looking up, +41.4 year over year, so it will be very interesting to keep tabs on how much we are exporting in the coming months and to see if that can tighten the marketplace up a bit.

•           Dry whey—bearish. Whey production was up 3.1% year over year at 81.8 million pounds. And the increased production wasn’t offset by demand unfortunately. Stocks jumped to a massive 87.1 million pounds up some 20 million pounds over a year ago and up nearly 30 million pounds from the 5 year average.

•           WPC—slightly bullish.  After the surprising revisions last month the WPC inventory level is holding pretty steady at 60.0 million pounds. Production fell sharply though by 12.6% year over year leaving open the possibility we could see a little decline in inventories moving forward.

•           Lactose—slightly bearish. Lactose production saw moderate growth of 1.9% year over year and along with the moderate growth in production we also saw some moderate increase in total stocks. We are nearly at 2015 levels up 1.2% month over month to 125.8 million pounds.

Dairy Production Highlights, May 2016 (%Change Year Over Year):

· American cheese production,  399,914 thousand pounds, down -1.91%

· Mozzarella cheese production,  345,955 thousand pounds, up 4.43%

· Butter production,  169,939 thousand pounds, up 0.30%

· Nonfat dry milk production,  165,057 thousand pounds, down -8.30%

· Skim milk powders production,  50,265 thousand pounds, up 41.44%

· Milk protein concentrate production,  18,140 thousand pounds, down -13.22%

· Dry whey total production,  81,826 thousand pounds, up 3.06%

· WPC total production,  38,385 thousand pounds, down -12.56%

· Lactose production,  89,933 thousand pounds, up 1.87%

Inventory Highlights, May 2016 (%Change Month Over Month):

· Nonfat dry milk inventory,  235,429  thousand pounds, down -6.60%

· Dry buttermilk inventory,  24,106 thousand pounds, down -2.30%

· Dry whole milk inventory,  15,428 thousand pounds, up 6.60%

· Dry whey inventory,  87,136 thousand pounds, up 3.50%

· Lactose inventory,  125,761 thousand pounds, up 1.20%

· WPC total inventory,  59,959 thousand pounds, down -5.70%


You want to talk volatility? Look no further than yesterday’s soybean trade as contracts were getting shelled early on in what appeared to be a route as technical levels were breached, stops were hit and funds kept on liquidating. Contracts traded as much as 40-50 cents lower before the trade put on the chain metal gloves and caught the falling knife. Granted, it was still a close in the red but the intraday recovery was impressive nonetheless and by the closing bell, contracts had rallied back to park near the 50 day moving average (red line on chart below).

The bean recovery did little to inspire corn, which settled about a dime lower and logged a fresh contract low for the December contract in the process, while wheat shed a nickel. The weather premium that was built into the markets has been taken out in short order, however there’s the likelihood that it’s been too much, too fast for this time of year. There’s still a lot of time left before the combines roll and weather risk still needs to be respected.

November Soybeans~Daily


We look for a firm opening to Corn and a weaker opening for Soybeans.

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