Morning Dairy Comments, 08/23/2016

Tuesday, August 23, 2016

General Market News

· Crude oil drops nearly $2.00, but USD closes well off highs

· Overnight Iraq announces plan to increase oil exports market continues yesterday’s slide

· Best Buy nears 10-month high after profit, sales beat expectations

· Russia, Iraq agree on dairy/meat export deal



Class III, Cheese & Whey

The bullish trend in Class III and Cheese should be tested today. Friday’s Milk Production report showed average growth at 1.4% nationally and for the combined total of the top 4 cheese producing states. Yesterday’s Cold Storage showed an increase of 2.0% in total Cheese Stocks. Class III and Cheese Futures are behind in the count 0-2. It will be up to the spot market to put futures away by bringing loads to the session.

There is plenty of cheese available, 1.27 billion lbs. to be exact; another record breaking number. Sure not all of it is of the right type and spec to bring to the exchange, but the fact is that we built inventories in Other Cheese, and American Cheese month over month at a time when fresh cheese was thought to be tight. These are July numbers so it is important to note that back then there was still a slight carry premium in the market. This could explain some of the inventory building, and cash and carry trade. All of that premium was gone by the second week of July so to say it is responsible for the 2.0% increase in stocks seems like a stretch. What seems more plausible is that for a short period of time, supply for a specific subset of the American cheese category not broken out in the Cold Storage report (Cheddar Barrels) was indeed tight in supply. Since July however, there have been reports of more production shifting to barrels.    

Future’s volume for Class III and Cheese was not overwhelming yesterday coming around 720 and 179 contracts respectively. Blocks during the spot session settled ½ cent lower to $1.86/lb. while Barrels remained unchanged at $1.865/lb. We would expect that yesterday’s inventory number will incentivize the market to bring additional cheese to the spot session and lessen buyer’s willingness to purchase cheese at these current price levels.

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

Cold Storage Report

The July 2016 cold storage report was released today and it was very bearish in comparison to expectations.

Butter stocks at the end of July were 333.12 million pounds which easily exceeded our expectations and was the first time since 2004 that stocks were higher at the end of July than they were in June. We saw a 1.5% increase month over month vs. our expectation for a 3.5% decline. With milk production being up 1.4% on Friday, not overwhelming growth by any means, this is particularly surprising. Butter futures have been under pressure of late and it seems likely that this will only extend that sell side pressure. Now seemingly the question is not how high will prices rally seasonally but rather how far might they fall? Seasonally demand season is still to come but at current it would seem we have plenty of supply to get through that period without needing to see a price increase.  

Cheese stocks also easily exceeded our expectations coming in at 1.276 billion pounds of total cheese and 770 million pounds of American cheese. As we mentioned above seeing this type of growth in stocks levels is particularly surprising given that we had just average growth in milk production. The other cheese category showed particularly strong growth in stocks the 5-year average from June to July is essentially unchanged however we were up 2.6% this year. The American cheese stocks growth of 1.7% was also above the 5-year average growth of 1.5%. Futures, somewhat surprisingly in our opinion, haven’t seen much of a reaction to this report but those holding inventory may be more willing to move some fresh product onto the spot market given this report in the coming sessions.




Class IV, NFDM & Butter

It’s a Fire Sale, Blue Light Special or whatever you want to call it, but butter has not be able to stop downward pressure, as CME Spot Butter settled 6 cents lower to $2.13/lb. sending futures drastically lower. Like we pointed out in our Cold Storage report, July was the first time since 2004 that stocks were higher at the end of July than they were in June. So it’s logical that prices would move lower, which makes this move all the more suspicious. Butter doesn’t act logically, or at least that’s the perception. The recent trend lower has not yet reached lows made at the end of July. When those lows were made no one seemed to have doubt that later in the fall we would begin to trend higher again. This time around weakness in butter has some questioning whether a move higher is in the cards or not. We are only in late Aug and from here on out we should see an increase in use of butter. End users may have put butter away in inventory but more than likely not 100% of needs. This why we think butter prices should stabilize at current levels and come Sep or Oct move higher along with seasonal demand.

NFDM settled lower yesterday on light volume; just over 100 contracts traded. During the spot session 4 loads traded hands as NFDM finished ½ cent lower to $0.8525. NFDM had an eventful week last week with strong showing from the GDT auction. This week is light on news but still not light on inventory, as that will dominate discussions until we see an uptick in consumption. There was reports of increased sales of whey powders and permeates going to Asia which has helped the whey market rally. Increased exports have not found their way to the NFDM, but the sudden increase in whey shipments reminds us that it can happen at a moment’s notice. Baring that from happening the cash and carry trade opportunity that has persisted in the futures market should continue, even if the bulls have their eye set on 1.00/lb. to end the year as Dec 2016 closed at 1.01 yesterday.     

We expect NFDM, butter & class IV to open lower across the board.  Butter futures traded 0.500 to 2.000 lower overnight.



Both corn and beans opened lower during the overnight, adding to loses in corn and taking some of the 8-11 cent gains away from beans. Corn conditions increased vs. last week by 1% to 75%, ahead of 69% LY and 56.4% 5 year average. Soybean conditions went unchanged at 72% but still way ahead LY at 63% and 57.2% 5 year average. Rains over the weekend helped improve already great soil moisture across the U.S. In Iowa and Illinois only 7% and 4% of fields respectively are thought of to be short on moisture. Day one of the Pro Farmer crop tour found South Dakota samples resulted in an average corn yield of 149.78 per acre and an average soybean pod count of 970.61 in a 3'x3' square. Ohio samples resulted in an average corn yield of 148.96 bu. per acre and an average soybean pod count of 1,055.05 in a 3'x'3 square.

Beans have been on a rally here since the start of Aug due to strong export demand. This bodes well for price but if demand continues throughout harvest it could put stress on our export capacity; a story frequent of South America and seldom of the U.S. Right now it is big demand that is driving beans and to a lesser extent corn. That will be hard to do once farmers start to get into the fields and are faced with the second part of the equation; big supply. However, an early frost and moisture caused disease are still a possibility. We may be building ourselves a little cushion like in the beginning of summer with threats of a drought, all to see it crash down come harvest.   

We look for the grains to open 2 to 5 lower across the board this morning.  


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