Morning Dairy Comments, 07/20/2016

Wednesday, July 20, 2016

General Market News

· New EU carbon scheme a threat to Ireland’s dairy industry

· U.S. Dollar Index at 4 month high, bolstered by strong U.S. data and expectations for interest rate hike this year

· Australian dairy farms moving milk from Murray Goulburn in search for higher prices

· Global stocks move higher on earnings, gold retreats



Class III, Cheese & Whey

Class III and cheese futures are caught in a bit of a conundrum as volatility has slipped away over the past two sessions while the market remains torn between rather curious bullish cash momentum and what continues to be bearish overtones from both a global and domestic standpoint. Yesterday’s GDT auction provided little in the way of a price signal as it registered an overall unchanged result, with cheddar prices slipping 1.1% in the process (see table below for complete breakout). With not much to see there, the trade quickly shrugged it off and focused on the spot call which gave the market pause as two barrel loads changed hands and sell side interest materializing north of the $1.75 mark. Have we reached the level where additional loads will be brought to the exchange? We would think so, as many aren’t buying into the recent chatter about barrel scarcity amidst strong restaurant demand as the catalyst for the recent bullish wave.  Rather these sceptics are likely looking at it through the lens that if prices reach a certain level then product will shake loose. High prices have a way of drawing out the sellers with attractive hedging opportunities. It’s also been widely publicized that restaurant demand has been strong as a result of the paradigm shift embracing natural fats and all-day breakfast menus, however USDA commercial disappearance numbers do not substantiate that notion and are nearly unchanged compared to year ago levels. Buy rumor—sell fact?

Tomorrow the market will get a look at milk production numbers for June, which are expected to come in 1.8% higher from year ago levels and while that’s not robust growth—it’s growth nonetheless (see table below). Rather mild conditions in the Midwest have offset the negative effects from heat in the Western milk shed and with the current massive cheese inventories on hand, it’s tough to make a case for continuation to the upside. That said, the trade is likely approaching that fork in the road where either a challenge of the June highs is on the docket or a pullback to test technical levels of support will materialize. Much of that will be determined by spot action as the spread remains wide at 7 ½ cents.  

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

Class IV, NFDM & Butter

Volatility in the butter market has gone AWOL of late as well, with the trade dismissing the 5% downdraft on GDT while remaining focused on the spot price which is holding around the $2.30 mark. The futures market is likely a bit fatigued and players have temporarily gone to the sidelines for the oxygen mask, as prices have whipsawed over the past month and are now clinging to technical areas of interest. Fear remains a key ingredient to any market and that has been the main driver for quite some time here. It is not implausible to consider that with the uptick in hedging over the past few years that a certain percentage of demand has been pulled forward, which could lead to downdrafts in the market a bit sooner than many might expect. Granted, heat concerns remain at the forefront as well as the heavy pull currently being felt from ice cream producers, but a push higher on spot might just be the tipping point to entice sellers to bring some loads to the exchange.

The NFDM market received mixed signals from yesterday’s GDT auction as WMP posted a 1.9% gain while SMP slipped 1.1%. Couple that with a lower spot call which looks to headed for a test of the $0.85 support level and futures were ripe to trim back as they did yesterday. The trade has been trending sideways to higher but with no real sense of urgency to spark a breakout, futures had likely gotten out a bit ahead of where they should’ve been and have been pressured of late.  The CWAP for the week ending July 15th was announced yesterday afternoon at $0.8118, down $0.0550 or 6.3% from the week prior.  Sales for the week were reported to have increased by 61.4% week over week to 10,519,545 lbs.



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


Grain markets are under bearish influences as crop ratings remain quite favorable and fund managers unwind long positions and in some cases turned net short as is the case with corn. Yesterday saw heavy pressure as funds were estimated net sellers of 20,000 corn contracts, 18,000 beans and 4,000 wheat. Corn is now flirting with contract lows and beans are revisiting levels seen earlier in the month after failing to close the upside gap left back on July 5th. At this juncture, the trade is largely discounting the extreme heat forecast to hit later this week as it is expected to be short-lived and recent rains should go a long way to getting the crop through it. If weather continues to cooperate then additional pressure could materialize however, this is a weather market and premium can be added just as fast as it’s been taken out. 

We look for the grain complex to open with moderate gains.


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