Morning Dairy Comments, 07/22/2016

Friday, July 22, 2016


General Market News

· Crude prices struggle anew in a week of supply-driven loses http://goo.gl/upzg2f

· Gold drops to session lows at $1323, headed for second week of declines

· Brazil’s Real falls most in region on Central Bank intervention http://goo.gl/88c0Uk

· In The Cattle Markets: Impacts of the Dairy Industry on Beef Markets http://goo.gl/hU0DgB

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Class III & Cheese

Although dew points are up with temperatures and dairymen are working overtime to keep their cows comfortable, the class III and cheese markets seem to be wilting like a leaf in the humidity. Thursday’s spot cheese session had blocks offered down 1 ½ cents as there were no bids showing. While barrels had steady bids at $1.75 ½ immediately sold twice, and more offers behind it. The market has been communicating issues with barrels out west over the past few weeks and yesterday was no different as blocks are sitting 9 cents below barrels, significantly outside the normal. Most recently on the barrel spot market we have seen offers from the Midwest, with a lack of offers from the West. Looking back at the USDA’s dairy product’s report numbers (see below) we can see a substantial move to lower American Type cheese production in CA, ID, and the “Other States’ while Wisconsin has shown healthy gains. This may hint that any incremental milk supply out west may have made its way to driers over the past few months. Since beginning in April we saw a decent recovery in spot NFDM recovery from about 70 cents. Also drier capacity out west has been expanded over the past few months meaning co-ops probably had incentive to redirect their milk flows accordingly. 

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Trader’s scrutinized yesterday’s milk production report, and it came largely within our expectations at +1.6% (see Map below). All of the trends that have been in place have not changed materially, and the market has priced this in. Looking at the Upper Midwest we still see plenty of milk, WI +3.8%, MI +5.4%, and we have NY +4.2%. As we stated 1.6% is about average and likely best called “neutral”. The caveat is that at $16.50 milk, a neutral call reads bearish.

There are concerns that trade policies with our neighbor Canada will add more headwinds to the market surplus in the Midwest and East. Milk has been tighter out West although we are seeing healthy gains in Idaho +2.3%. Some excess milk loads from the east have been filling the gaps out West. 

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

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Class IV, NFDM & Butter

The spot NFDM market was down 2 ¼ cents to 84 cents on 2 trades yesterday. EU quotes were unchanged in Germany and France at €1,760 and €1,720 respectively, while Dutch prices were up€10/mt to €1,730 all slightly higher then intervention prices. 6,613mt of SMP entered the EU’s intervention compared to 8,849mt the week prior. Milk production in the EU in May was estimated at 14.13MMT up 0.8% from last year, but 4.4% ahead of the 3 year avg. We are seeing a slowdown in the increases for EU production as we are comparing to post quota gains started in April 2015. To keep it in perspective, it’s hard to compare the Q1 2016 production to Q1 2015 as producers intentionally pulled back production to avoid superlevy fines. That’s why we witnessed such strong gains in EU production in Q1

Mexico is a big buyer for US NFDM, especially over the past year (see exports below). We think they have been in the market lately, and that may partly explain the shift from NFDM to SMP production in the prior months. Although with spot NFDM moving from the low 70 cent range to the 90 cents recently it may be less attractive to buyers. This is especially true as the Mexican Peso has continued to decline against the dollar throughout 2016.

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Butter futures were slightly lower yesterday on light volume, and calendar spread trading in Aug-Sep. All eyes will be on today’s Cold Storage report released at 2pm Central. FCStone’s estimate’s for June’s inventories are at 332.1mil pounds, 29.7% over last year and 2.2% over May. The interesting part there is the growth month-to-month. Typically we build stocks up to May and begin pulling them down in June (not every year, but many). If our expectations are correct, it will be the first time in five years we’ve seen June holdings higher than that of May. To keep perspective, when that happened in 2011 US cold storage facilities had just over half of the current inventories we see today (170 mil lbs. in May 2011 to 190 mil. lbs. in June).  The market has continuously shrugged off these bearish reports as a substantial amount of AMF is included, and that’s not what the market is concerned about today.

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

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Grains

We’re used to “hot and dry” Corn Belt weather. We’re used to “cooler and wet” weather too. This year we’re getting “hot and wet”.  It’s as if the corn gods (or goddesses as they may be) bestowed perfect weather for growing a bumper crop. Even the La Nina worrywarts are being taken to the woodshed as corn prices continue punch out new lows.
The corn market pushed lowers as funds pushed the gas pedal on their selling efforts while the supportive technical setup is crumbling.  Current and projected fundamentals are lining up to force corn even lower in the coming weeks and months.  Soybean futures managed minimal gains as lingering concerns surrounding weather conditions during the critical month of August have alleviated some of the bearish market forces.   Some updated weather models relating to La Nina should see the soybeans move lower today.  The latest IRI/CPC ENSO model predictions showed a shift towards a weaker La Nina event through the end of the year and into early 2017. 

We look for the Corn, Soybeans and Wheat to open lower.

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