Morning Dairy Comments, 08/29/2016

Monday, August 29, 2016


General Market News

· German economy minister says EU-US free trade talks have failed  http://goo.gl/Kwwkvt

· Central bankers spurn call for radical approach at Jackson Hole http://goo.gl/fbXZNj

· Chinese Cheese and Russian butter: How to eat dairy in North Korea http://goo.gl/V3ooJC

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Class III, Cheese & Whey

What a week for Class III and cheese as the market went from pressing $18.00 (September) before imploding back to near $16.50 with the board lighting up on Friday as over 2,800 Class III contracts changed hands. Spot dragged 2016 futures lower by their boots last week. When the dust settled Friday, the trade had forgotten about the USDA’s token purchase of 11 million pounds of cheese as sell side action ramped up in earnest.

Markets typically take the stairs up and the elevator down and last week’s action was no exception. Initial support levels for futures failed one after the other, which served to build pressure late in the week before the brakes were finally applied near the 50 day moving average during Friday’s session, as indicated by the red line on the chart below. Also of note would be the top, dotted black line at $16.51, which is the first level/target for Fibonacci retracement and also a tick away from Friday’s low for the October contract.

When it was all said and done block cheese fell 12.50 cents on the week, to close at $1.7400/lb., in a market that saw 18 loads change hands. Barrels ended the week 18.50 cents lower at $1.6800/lb., with 3 loads traded. For the first time in nearly three months (since May 6th), blocks hold the premium and with the spread now back in relative alignment. A case could be made for a bit of a consolidation period around current levels because of this adjustment. And that would make sense fundamentally. Although stories have turned to more cheese being available over the past week (much in the under-grade category), we’re not sure that some of the cause for $1.80+ cheese has been fully washout of the market.

That said, based on Friday’s settling spot market, the Class III milk price would be $16.08/cwt., after calculating to $17.53/cwt the week prior. Futures remain at a premium to that level and have for most of the move down as the trade wanted some proof that cash was indeed heading lower in a sustainable fashion. It got confirmation on Friday and in all reality, prices would seem to be more in line with fundamentals in the $1.60’s and maybe lower from there considering record inventory levels, relative strength in the USD, cheap grain prices that could potentially get cheaper once the combines start to roll, and herd expansion.
In Thursday’s monthly Livestock Slaughter report, USDA-NASS reported July dairy cow slaughter at 213,300 head, down 10.6% versus 2015 levels. On a daily basis, June slaughter was 7.7% lower than the previous month. Year to date, dairy cow slaughter at 1,662,600 head is running 2.4% below 2015 on a daily basis. More cows…cheap feed…let’s do the math— it’s adding up to the potential for more milk.

October Class III~Daily

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

 

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Class IV, NFDM & Butter

Class IV futures also fell over the past week as component weakness rippled through both NFDM and butter. On the powder side of things, the spot price remains stuck in the mid-80’s which has worked to keep futures range bound. That dynamic may continue for some time with more than adequate domestic supplies and heavy stores of SMP in EU intervention. The latest GDT auction did see quite a spike in the price of WMP, which is signaling that international prices are trying to round out a bottom, but before getting carried away we’d like to see additional follow through. Dairy Market News reports that the skim milk powder (SMP) price for August 8 – 19 in Western and Eastern Europe was $0.9355/lb., up 2.83 cents from the previous period. The price in Oceania was 90.72 cents, up 3.40 cents from the previous period.

Butter futures spent most of the week under pressure as the spot price was pressured back to near $2.05 with a test of the critical $2.00 level looking more plausible every day. Nearby futures have retraced back to long term support levels, which could serve as a spring board to stage rallies off of if spot holds the $2.00 mark. If Spot is unable to hold that line, then futures will also most likely break what is really the only technical level remaining that would offer any material support. The October-December futures chart below demonstrates this as the black line represents the 200 day moving average, where it’s clear to see that it’s been a long time since futures were anywhere in its proximity but are now clinging to it.  Dairy Market News reports that the 82% butter price for August 8 – 19 in Western and Eastern Europe was $1.7634/lb., up 15.31 cents from the previous period. Oceania’s price was $1.4288/lb., up 11.34 cents from the previous period.

October-December Butter Strip ~Daily

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We expect the NFDM and Butter to open firm.

Grains

Grain markets remain under pressure with corn on a five day skid and hovering just above contract lows while wheat and beans are faring about the same. Crop ratings continue to impress and actually improved last week at a time when they typically erode. Feedback from the Pro-Farmer tour put a question mark on whether final corn yields will come close to where USDA has it pegged with a nearly 5 bushel per acre spread between the two at 170.2 and 175.1 bushels per acre, respectively, but at the end of the day the trade is discounting any shortfalls on the assumption the crop will be massive. Pro Farmer bean yield estimates came in close to USDA at 49.3 bushels per acre, compared to USDA’s 48.9 forecast. The latest CFTC Commitment of Traders report continues to show managed money adding to their short position in the corn market and are now starting to bail on their long bean positions. This is evidenced in the chart below where December corn attempted to round out a bottom and began to claw its way back higher before funds unleashed additional selling pressure and sent it on a five day losing streak where a possible challenge of the contract lows could come this week. 

December Corn~Daily

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We look for grain complex to open lower led by the wheat down 6-9 cents, soybeans down 2-5 and corn down 1-3 cents.
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