Morning Dairy Comments, 08/16/2016

Tuesday, August 16, 2016

General Market News

· World stocks edge away from one-year peak, U.S. Dollar on defensive

· Crude oil nears $46/barrel as Nigeria sees OPEC cuts unlikely

· Murray Goulburn backs milk price transparency plan to help dairy farmers

· Global milk prices may have turned corner in Fillip for Kiwi

· GDT Auction underway, NZ Dollar higher



Class III, Cheese & Whey

A deceiving amount of trading activity took place yesterday in the Class III futures market, trading over 1000 contracts for only the 6th time in over a mouth. Nearly half of the trades actually occurred late Sunday night sending futures as much as 34 cents higher. The reason for such a profound move to the start the week seems like a textbook case of buying the rumor. As many of you know by now the National Milk Producers Federation asked the USDA to provide aid to dairymen in the way of purchasing cheese. That was the extent of the reports however. It is still unclear whether such a proposal will be implemented. The practicality of such a program is debatable. The futures market was looking to spot for reassurance of the move higher. Blocks and Barrels both closed UNCH at $1.78 and $1.865 respectively, bringing futures off their highs but still modestly higher.

We talk a lot, including later in today’s commentary, about how much end users have in storage for the holiday season. Generally the topic is brought up when discussing butter, but the same discussion should be had about cheese. Looking back at the forward futures curve just a couple months ago showed an extreme carry premium to Q4 cheese futures. When Cash Cheese was trading in the $1.30-$1.40s, Oct-Dec Cheese futures were in the $1.60. Most market participants did not anticipate the rally we have witnessed this summer and may have been light on covering the needs this fall.  We expect prices to come down in the coming weeks, but if there’s a bigger chunk of holiday buying that still needs to be done - it’s not a forgone conclusion that they will stay lower.



CWT announced the acceptance of 1.506 million lbs. of cheese into their export assistance program yesterday. Delivery period is scheduled till the end of year. Cumulatively, CWT has assisted in the export of 32.161 million lbs. of American type cheese this year.

We look for Class III and Cheese to open slightly higher, Dry Whey firm.



Class IV, NFDM & Butter

The market sentiment for butter remains content. We have been range bound on spot for 2 weeks now, trading between 2.20 and 2.27. Cream supplies out east have been tightening up now for some time, as they have been dealing with warm and dry weather to end the summer. For most of the U.S. school has started or will start next week which should add to tightness out east. The big question remains how much have end users forward bought in preparation for this fall. We think more so than in previous years which should prevent us from seeing the spike in prices we witnessed last year (and 2014). However, some major factors that will be supporting butter prices in the coming week. The seasonal uptick in consumption, the finite amount that can be bought physically and the illiquidity of the deferred futures months that can prevent would be hedgers. For now though the market seems balanced as we wait for those dynamics to play out.  

NFDM traded mostly lower yesterday on the eve of today’s GDT auctions. Futures volumes were nothing to write home about which leads us to believe that most market participants are waiting for the auction results before deciding on a new price direction. Spot NFDM is the lowest priced dairy commodity traded on the CME from a 5 year average price standpoint point. Whey is a close second, but dramatically less influential when calculating Class price. There are price relationships in all dairy commodities even if a correlation coefficient says otherwise.  Below is monthly chart of spot NFDM, Blocks and Barrels. All tend to follow the same trend, yet as of late NFDM has been lackluster. This should eventually correct itself.


We expect NFDM to open higher, butter lower and Class IV steady. 


Grains settled higher yesterday as the story from Friday’s report shifted from massive crop to bargain buying. Big crops get bigger and because of that it’s hard to envision massive upside potential for these markets. But soybeans tend to get a seasonal boost ahead of Labor Day – and corn could be along for the ride if more strength in beans materializes. Come harvest the massiveness of this year’s crop following two bumper years will likely weigh in on the market.  


Funds were thought to be buyers of both corn and beans yesterday; 6,000 contracts for corn and 9,000 for beans making their net position -140,000 and +105,425 respectively. CFTC data released Friday showed funds 30,000 contracts shorter than anticipated, which assisted in yesterday’s rally. The beans position was in line with estimates. 

Crop conditions for corn and soybeans remain unchanged vs. last week. Corn did see 1% move from good to excellent condition leaving the combine state unchanged. Corn export inspections came right in-between trade estimates. Export inspections for beans came in under trade estimates at 746 MT, while the trade was expecting 800-1000 MT.  

We look for the soybeans and corn to open moderately higher, wheat lower.


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