Morning Dairy Comments, 07/28/2016

Thursday, July 28, 2016


General Market News

· Oil falls on surprise stockpile increase; Crude stocks rose 1.7 million barrels last week; a 1.6 million-barrel decline was expected

· China-backed $200m Southland dairy plant plans unveiled http://goo.gl/3wnY4b

· Hershey swings to profit as revenue climbs http://goo.gl/y7XZsW

· Danone first-half beats forecasts with improving dairy business http://goo.gl/Hl8Yq0

· Oracle to buy NetSuite in $9.3 billion deal

· A cheese made from…. donkey milk? http://goo.gl/Pv3ECz

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Class III, Cheese & Whey

Class III and Cheese futures were like a roller coaster yesterday; down then up then almost back to where they started. It sounds a lot more exciting than it actually was, and for those who watched closely without falling asleep yesterday may call the comparisons a stretch. Maybe a kiddy ride is more fitting as a large majority of Class III futures contracts could not deviate more than 10 cents from UNCH. Daily volume for Class III added to the monotony of the market as 568 contracts traded, even less than the previous day of 782 (which is already low). Cash Cheese experienced the same drop off in volume. With yesterday’s gains, Class III and Cheese futures remain net positive on the week, but the trend of higher prices seem to be running out of steam.

Elevated spot prices seem to have end users taking a step back as sales volume for fresh barrels last week were at their lowest level in 2016; as reported by the NDPSR. Last week’s sales volume was coming off strong sales before then either. The chart below shows week by week barrel sales volume for the previous 5 years. Block sales did slide a little last week at 12.4 mil lbs. about 1 mil shy of the 2016 average. It is hard to make the case this drop was caused by inventory building due to the large stocks already in storage.

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The 14 day weather outlook is forecasted to stay within seasonally averages, maybe even a cold front out west. This might help unwind some of the weather premium thought to be built into the Cheese and Class IIII market.

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

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Class IV, NFDM & Butter

The butter market is crumbling here lately as yesterday saw limit down moves for August thru November 2016 and January of 2017. The CME expanded daily trading limits for today from 5 cents to 10 cents. The overnight trade, however, was steady and quiet.

There has been a rather healthy premium to the butter futures forward curve for some time now. While the spot market is only inching lower, the futures market is opting to take large swaths of price out as the market seems less comfortable with a steep carry. The butter market is notorious for swift, rather large spot price moves (in both directions). We haven’t seen that yet, but the question on the minds of traders is: (1) will spot prices continue to work lower, and (2) if so, what price is the tipping point to a less orderly (read: more precipitous) price decline. In other words, is there a level at which the market simply collapses as we’ve seen in the past?

With intense heat out west this week, the trade may stave off any type of significant collapse in prices in the near-term. But so far the weather forecasts have taken a back seat as traders are focused on inventories and available supply of butter. Weekly butter storage was down 3% from last week but remains above 30 million lbs. – 57.1% higher than the same time last year. While the weekly numbers are not market drivers, it’s worth keeping in mind.

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NFDM futures remained under pressure again yesterday. Moderate trading volumes were met with modest declines in open interest signaling that some longs are still looking to exit positions amid what has become a period of quieter demand. That said, spot NFDM was up ½ cent yesterday on 4 trades, so the mid-80 cent area still seems to be an appropriate or equilibrium price for powder right now.  We don’t expect that to change today. And NFDM futures look a little oversold technically, so we would not rule out a modest price recovery for powder in the near-term.

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

Grains

The grain markets traded mostly firmer as the longer term weather forecasts turned warmer and drier. Many in the marketplace are referencing hot overnight temps as a potential driver of lower potential final yields similar to what was seen in 2010. However, the deviation from normal so far this year is far less than that of 2010 and crop ratings continue to run well above that year as well. The crop isn't fully made, but corn is nearly there and while soybeans can still suffer with a hot dry August there's been nothing so far this summer that would indicate a potential problem ahead. We've been talking about the potential for hot dry weather since early spring and thus far the growing season has mostly been a greenhouse for the upper Midwest.

Seemingly by the end of the day the market had grown a little weary of that continued chatter of potential as we settled off the highs. Corn prices were up 3.5 cents at $3.43, wheat was down 1/4 cent at $4.1475 while soybeans led the gains with Nov up 12.25 cents at $9.86. Today's export sales report will be closely watched as soon the question will move toward the demand side of the equation once final production estimates get settled upon. 

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We look for Corn, Soybeans and Wheat to open steady to 3 cents lower.


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