Morning Dairy Comments, 08/26/2016

Friday, August 26, 2016

General Market News

· Janet Yellen Speaks at 9am CST today.

· Second-quarter GDP still weak: 1.1%

· U.S. trade gap narrows in July, advance report shows

· Domino’s is one step closer to delivering pizzas by drone



Class III, Cheese & Whey

Class III and cheese futures volumes jumped yesterday as prices remained largely under pressure. Spot blocks fell another 4.25 cents while barrel cheddar dropped 3.00 cents to finish at their lowest levels since the beginning of August. Over 2,200 class III and over 1,000 cheese futures changed hands on sharply higher open interest as pressure continues into 2017. And speaking of 2017, that’s where a lot of yesterday’s volume took place.

About 40% of the class III trades took place in 2017 and a whopping 66.5% of the cheese futures traded yesterday did so in 2017.  January to December cheese pack traded between $1.7170 and $1.7200 21 times alone before settling at $1.7140. Dry whey, too, traded rather aggressively in 2017 as well. 188 of the 220 dry whey trades occurred in 2017 yesterday leading to presumption that not only is hedging activity starting to heat up – but speculative interests are driving a portion of the liquidity out there as they create a synthetic cheese price using class III and dry whey and take an opposite position using cheese futures – arbitraging minuscule price disparities. 
Option volumes spiked too. Over 3,500 class III options traded yesterday. Much of the options activity occurred in September-November yesterday, but there remains good options interest well into 2017 this week. Although many commercial hedge interests have begun setting budgets for 2017 over the past month, it’s producer profit margins which are really looking attractive lately. Producers are getting to work with at least the first leg of coverage for next year now as corn prices flirt with two-year lows.
Overall, we see the weakness in cheese as making sense today. We recognize the bubbling up of prices globally, but think that $1.60 is a more appropriate price for cheese than $1.90 for now (and unless some holiday buy side demand really heats up – if it’s going to later this year). That being said, we wouldn’t be surprise to see continued buy side interest on spot cheese that may slow the decline and hold us up here in the $1.70’s for a few days. If such is the case, expect today to be a mixed trade that could show some double-digit gains by the closing bell.
We realize there is some more expensive feed from earlier in the year on dairies today, but much cheaper feed and relatively dismal beef prices are prompting producers to keep more animals milking. For the week ending August 13, dairy cow slaughter under federal inspection was down 0.2%, at 53,300 head, compared with the same period the previous year. Year-to-date slaughter levels are 1.6% lower than 2015 levels, with 1,806,700 head slaughtered.

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


Class IV, NFDM & Butter

Class IV, butter and powder all traded mixed on light to moderate volume yesterday. NFDM is showing some early strength this morning while butter, too, is technically poised for a modest recovery bounce. Ultimately, the cash markets appear adequately priced to us and that may limit upside prospects next week.
Taking a quick look at spot butter, which saw an unfilled bid yesterday, we see that the market is now trading right above key long-term trendline support. If the price of butter breaks this level – if we should trade south of $2.00 let’s call it – then we may be entering into a new period of lower butter prices.
Weekly Spot Butter Chart
clip_image007The Dairy Market News Western Mostly NFDM price was up 1.75 cents from the previous week at 90.00 cents per pound. Last week’s CA Weighted Average price was 84.40 cents, down 0.85 cents from the previous week. The CME Grade A NFDM price is down 1.75 cents from last Thursday at 84.75 cents. There were 17 trades.

NZX futures were mixed mostly lower to end the week.

We expect the NFDM and Butter to open firm.


Corn and soybeans look poised for modest strength to start the day.  With problems on the “Pro” farmer tour few and far between, National yield expectations are still strong for corn and soybeans. End –users of corn are encouraged to look at getting some new crop coverage if you haven’t already done so. Call us to discuss.

We look for Corn to open steady-1 higher and Soybeans to open 2-4 higher.


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