Morning Dairy Comments, 08/18/2016

Thursday, August 18, 2016

General Market News

· Global stocks rise, Dollar weakens on divided Fed

· CME Group to delay listing of new cattle contracts

· Fonterra giving dairy farmers a financial boost, to pay 10 cent dividend

· Nestle posts first half sales growth aided by strong North America sales



Class III, Cheese & Whey

The Class III complex produced an impressive trading session yesterday as trading volumes spiked greatly higher in all three markets, as Class III traded over 2,000 contracts for the first time since June 29th.  The Class III contracts settled between 1 and 34 cents higher through the end of 2017 as the spot Blocks gained 4 cents in an effort to narrow the Block/Barrel spread. 
A divergent trading pattern emerged yesterday as the cheese futures settled 0.1 to 2.6 cents higher in the 2016 months, but mostly lower for the 2017 contracts.  The selling in these deferred cheese contracts occurred at the same time the dry whey futures leapt higher, settling between unchanged and 3.1 cents higher through June 2018. 
From a technical standpoint, many class III contracts are standing alone in “breaking out” to the upside – making new high price prints after a period of consolidation (sideways trading). This can be very bullish or it can be a massive head-fake - and the jury is still out. Good news: if it’s a head-fake, we’ll likely know in the next day or two. Head-fakes generally don’t take weeks to unfold. Visuals are better in this case. See the chart below, which depicts the price activity for the January-June Class III futures pack (outright contracts have similar set-ups). This is a picture of the “break-out”.


One interesting note here is that cheese futures are not looking the same way. Could that be a sign that this break-out is a weak one? Could it be that dry whey is really leading the charge and cheese is more than adequately priced? Could it be a sign that cheese has just yet to follow class III in earnest? We’ll get a better idea of the answers over the next few days. For now, cheese is languishing below resistance. Below is a chart of January to June cheese futures pack, which remains in a tough fought battle around the $1.70 mark. A battle the market bulls have so far lost.


The NDPSR for the week ending August 13th posted yesterday with the Block price gaining 3.54 cents week over week to $1.7327 as weekly sales were pegged to have increased by 6.5% to 13,242,676 pounds.  The Barrel price added 3.16 to $1.8433 while weekly sales grew by 2.9% to 9,945,980 pounds.  The Dry whey price remained unchanged at $2827 as sales increased by 24% to 8,131,887 pounds. 

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



Class IV, NFDM & Butter

The Class IV futures closed out yesterday’s trading session with mixed prices, ranging from 9 lower to 6 higher while a majority of contracts remained unchanged, as values we caught in a tug of war between the surging NFDM market and the tumbling butter.  NFDM futures were initially supported by the NZX markets before the push higher of 2.25 cents registered during the spot session leading to contracts settling between unchanged and 3.025 cents higher through the end of 2017.  Trading activity was robust as roughly 400 contracts changed hands in continuing efforts driven by the recent GDT auction, and more specifically the strength of the WMP during the event.  NFDM futures should continue to derive support from the short covering/positioning underway in the New Zealand market as the WMP price continues to inch towards the hallowed $3,000/MT level which would push most NZ dairymen to breakeven pricing while at the same time signaling the conclusion of the bear market. 

The NDPSR for the week ending August 13th resulted in the NFDM increasing in value by 0.42 cents week over week to 85.34 while weekly sales were projected to have fallen off by 8% to 13,357,303 pounds.  The butter price was announced at $2.2188, gaining 0.34 cents while weekly sales increased by 32.9% to 3,421,805 pounds.

Butter futures tallied nearly 300 trades, but submitted a performance in stark contrast to the NFDM.  The 3.75 decline in the spot price exasperated early session loses in route to contract prices declining by between 0.425 and 4.950 cents for the August through March months.  Domestic demand continues to run at elevated levels, increasing year over year at a higher than historical rate, while the availability of cream has decreased marginally in some regions. Despite this, speculations that butter prices could see a significant rally during the holiday demand season are waning.  We expect butter prices will have a choppy decline heading into Labor Day.

We expect NFDM to open steady to higher following NZX WMP strength, butter lower.


The grain markets all moved higher yesterday as market participants have moved on from the bearish results of the USDA’s recent crop report to focus on the potential demand for U.S. originated crops.  Corn contracts moved marginally higher despite weather models forecasting impending rains for the parched far Eastern Corn Belt as projected rains in the South with hinder harvest rates.  Of note was the USDA’s revision to projected feed demand for 16/17 released yesterday.  The USDA has forecast now that demand for corn for animal feed is to increase from 1.5 million tons this year to 1.64 mt next year, while at the same time boosting wheat feed demand by a substantial margin.  The projection for corn feed usage for this year is optimistic at best while calling for a significant increase in corn use next year despite the numerous substitute feed rations seems to be based solely on the current depressed value of corn.  Funds were credited with buying 8,000 contracts on the day as the corn market (graph below) looks to have formed a bottom.

Soybean contracts led the complex higher, aided by the strong surge in soybean oil values relating to supply constraints due to the demand for bean oil as a substitute for palm oil.  Adding to the bullish tilt of the market was the reported sale of 381,000 MT of soybeans to China for delivery during the 2016/17 marketing year.  In conjunction with this announced sale was the amended export sales announcement from August 4th.  Originally reported was the sale of 129,000 MT of corn for delivery to unknown destinations for the 2016/17 marketing year, but this was altered to reflect that the sale was actually of soybeans and not corn.  Funds were estimated to have bought 5,000 soybean and 7,000 soybean oil contracts on the day.

The wheat complex inched higher on short covering efforts.  U.S. wheat remains overpriced for global export demand despite the ample supply. U.S. and FSU crops could be larger than projected just last week based on satellite imagery and anecdotal reports.  A beneficial rain pattern remains in the Australian wheat belt which will bolster yields adding to an already massive global crop.  Funds were thought to have bought 3,000 contracts on the day.

December Corn – Daily Chart


We look for the grain complex to open lower, led by declines in the soybeans. 


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