Morning Dairy Comments, 07/26/2016

Tuesday, July 26, 2016

General Market News

· U.S. Stocks in holding pattern; eyes on the Fed

· Oil futures down again this morning after settling at 3-month low yesterday

· McDonald’s reports second-quarter 2016 earnings

· Proposal could bring state’s second-largest dairy to eastern Oregon

· What drove Domino’s Pizza’s 2Q16 same-store sales growth



Class III, Cheese & Whey

Class III futures continued their move higher yesterday, shrugging off a somewhat bearish Cold Storage report as most chatter pointing to the heat spell experienced in most of the Midwest last week. We think that was already built into the market and that residual strength yesterday was more about heat out West this week. The block/barrel spread, which continues to be inverted, needs to be corrected. Current fundamentals would suggest that barrels would eventually come down to close that gap. That has not been the case. What we may be seeing is the futures market factoring in a move higher in blocks to correct the spread. If blocks do not move higher, seasonally speaking barrels demand should start to tail off.   

Outside of the block/barrel spread needing to be corrected; this rally has exhausted its fundamental credibility. We have called for a move lower not so long ago to no avail, but markets tend to overreact and that may be what we are experiencing here. In fact, looking at the broader commodity industry Class III and Cheese seem to be the only commodities trending higher these days. The black bars on the chart below represent Class III futures.


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



Class IV, NFDM & Butter

At least some of the inventory reported in Friday’s Cold Storage report made its way to the spot market yesterday. 4 loads traded hands during the session, before settling 3 ½ cents lower to $2.26/lb. Which considering the justification for higher Class III and Cheese futures one would think the same case can be made for butter. Well a lot of cases can be made for butter both past and present. We all known butter marches to the beat of its own drum. For now that beat is lower.

Compliancy from last week persisted in NFDM futures yesterday. The Feb 2017 futures contract made up the vast majority of trading activity; trading 29 times. All other contracts only traded a total of 19 other times. However, bearish news has been building for deferred month contracts especially. The dollar has been on a month long rally, a step drop in crude prices draw concerns of a retracement back in to the S30, and exports are down 28% YTD. Internationally, SMP prices have been able to bounce off their lows and show some traction. That is easier to do when the government buying a portion of the surplus.

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


Rain makes grain and lower prices. Continued rains make even more grain and even lower prices, or at least was the case Monday. The crop progress report released yesterday once again show conditions well above the 5 year average in IL, IA, WI, MN, and NE. Additional rain coverage this week, coupled with favorable temps have the chance of improving the already stellar conditions. Funds were quite today in corn, keeping the net short position around 46,000 contracts, a vast change from a month ago when they were long 183,000; but then again there has also been a vast change in price since then. On the other hand, Funds were thought of to be sellers of beans, decreasing their long position by 14,000 contracts to net long 75,276.

Corn and Wheat are called to open lower and Soybeans called to open slightly higher in line with the overnight.




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