Morning Dairy Comments, 07/25/2016

Monday, July 25, 2016

General Market News

· Democratic convention kicks off today in Philadelphia

· Verizon is buying Yahoo for $4.8 billion dollars

· The Federal Reserve is scheduled to for two days of meetings Tuesday and Wednesday

· California wildfire triples in size under hot, dry conditions

· Crude oil falls to 2 month low as drilling increases amid surplus

· Chinese demand could signal green shoots for dairy prices



Class III, Cheese & Whey

Class III and cheese futures got a boost Friday on two key factors: 1) Spot market activity and 2) western US weather forecasts. Friday’s session closed out the third week of gains for both blocks and barrel cheddar. Spot blocks posted a 4.25 cent gain on Friday to record a new high price for 2016 – a level that hasn’t been seen since last November. Barrels rose 2 cents to post an 18-month high of $1.7775 (Barrels haven’t been at this level since November of 2014). Also underpinning the market was a hot forecast for the western US states this week. Daytime temperatures are expected to jump north of 100 degrees from Bakersfield to Sunnyside, Washington – and nighttime temps are expected to clock in north of 70 degrees for at least several days this week capping the relief felt from the overnight hours. Upper-Midwest heat was not as bad as expected but dew points made the past 72 hours very uncomfortable. Good rainfall is the silver lining here. For now dew points are down this week and it’s shaping up to be a nice (with the occasional storm) mid-summer week for much of the Midwest.

On the other hand, Last week the USDA offered up what we would call a neutral Milk Production report for June. Also after Friday’s close the USDA delivered what we would call a mostly bearish June Cold Storage report. Please see our comments below:

Butter inventories climbed for the seventh consecutive month posting a record high level of 326 million lbs. in June.  We were looking for the number to eclipse 330 million lbs. in June, so technically holdings are lighter than we were looking for, but let’s face facts –inventories of butter are not light. In fact, during six of the past 10 years June butter stocks fell. During the past five years, the average drawdown of butter stocks in June is 4.1 million lbs. and the average holdings some 84 million lbs. lighter than we have today. This time around, we added 1.1 million lbs.  Anyway we slice it; we have to call this report bearish for the butter market.

Cheese inventories too fell short of our expectations, which could be looked at with a slightly bullish tilt (really stretching the word could here). June stocks were 2.4 million pounds less than expected.  But that’s about where the bullishness ends. American cheese stocks were reported at 758.6 million pounds - 10.6% higher than a year ago and 0.1% above the previous month. Total cheese stocks in June of 1,251.6 million pounds were 9.6% higher versus a year ago, and up 0.2% from last month. Stocks were 9.2 million pounds less than expected; while the previous month’s stocks were revised 0.1 million pounds lower.

The American cheese supply at the end of June was equivalent to 60 days’ worth of use, compared with 59 days last month and 54 days last year. May stocks also increased 0.08 million pounds. With all this we’re not going to lean too hard on small fluctuations vs. our expectations. The U.S. American cheese supply is still running about 91.9 million lbs. heavier than the five-year average. 

This is not a bullish cold storage report. It’s not even neutral when you consider the pricing action in June. Both block and barrel cheddar rallied 39 and 44 cents in June, respectively. Weather is still going to be a concern going forward especially as the forecast is looking very hot for California in particular.  On the merits of this storage report, however, we expect a lower opening Sunday night for the dairy complex.


USDA’s weekly stocks report, which doesn’t include all facilities in the monthly report, shows butter stocks are 57.4% above a year ago but cheese holdings are 7.2% lower. The monthly Cold Storage report shows April ending stocks up 27.4% from a year ago for butter, up 10.6% for American cheese, and 9.6% higher for total cheese.

Slaughter for the week ending July 9 was down 16.7% from a year ago, at 43,900 head. Year to date, slaughter is 1.8% lower than 2015 levels, with 1,544,900 head slaughtered. May monthly slaughter was up 0.99% from 2015, at 223,700 head and 7.7% higher than the previous month. So far in 2016, dairy cow slaughter is 1.1% below 2015 on a daily basis at 1,449,400 head.

One other consideration this morning is concerning the outside markets – in particular energy prices. Crude Oil is down another 1.5% this morning and looks focused on the downside. With all the talk focused on weather lately, we would be remiss not to point to the crude oil market as a driving factor for commodity prices generally. And from our vantage point, getting back into the high $30/bbl is a distinct possibility. Will this have an impact on commodities at large? We think so. More on this subject this week….

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



Class IV, NFDM & Butter

The spot NFDM market was up ½ cent to 84 ½ on Friday with 7 trades. Futures were firm on light trading activity. The market is quiet as many traders especially in Europe have been on summer vacations.

YTD European SMP exports are down 12% over 2015 at 268,522mt sold. The EU’s top markets were Algeria -20%, Egypt -23% and China +14%. MENA buyers have been hand to mouth as they are struggling with smaller budgets with the decline in oil revenues. EU exports have also been down because of substantial volumes being committed to the intervention program. France is the leading exporter for YTD 2016 accounting for 67,106mt, Germany with 59,466, and Belgium 34,132.

YTD US NFDM/SMP exports are down -28% over 2015 at 215,537mt. YTD Exports to Mexico are up 1%, down 15% to SE Asia countries, and China down 57%. Finally NZ SMP exports YTD are up 1% at 183,809mt and Australia down 7% at 78,012mt.


Friday’s USDA Cold Storage showed butter stocks at a record high 326 mil pounds, up 27% from June 2015. We were looking for a slightly higher number off 332, but we are still viewing this report as bearish as we built stocks when we typically start drawing down stocks from May. We continue to expect willing sellers north of $2.30, which may eventually evolve in to those willing to sell more aggressively below $2.30. We don’t see a lot of upside for butter from current levels. 


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


Grain markets are slated for a mixed opening this morning with expectations on follow-through downside pressure amid better weather and better forecasts. Some models have more heat building in the 8-14 day forecasts but those models also seemed to predict a dire situation for the past week that never really materialized. Sure some of the recent heat likely lowered some crop ratings, but overall the picture remains bearish for the grain complex this morning.

Recent flooding in China does not look to have done much damage to the corn crop but some damage may be going on in the rice producing areas.


Grains are opening lower this morning.

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