Morning Dairy Comments, 09/22/2016

Thursday, September 22, 2016

General Market News

· Stocks and bonds push higher as Fed inspires global rally

· Fonterra announces $807 million profit

· $45 million credit line extended to help unload Hanjin cargo

· China removes ban on some U.S. beef imports with conditions

· US weekly jobless claims total 252,000 vs. 262,000 estimate



Class III, Cheese & Whey

If you looked at the price action of class III and cheese alone yesterday, you’d either cringe or say ‘well now, that figures’. Most of Tuesday’s 2016 gains we’re erased with little trouble as the market digested solid milk production and big cow numbers as reported by the USDA. The spot call followed, left the cheese average in the mid-$1.50s, and further tightened the lid on market prices pushing nearby contracts to double-digit losses. But the stand out feature of yesterday’s futures market declines was not the price action, but instead the trading volume in key nearby contracts.

899 class III contracts changed hands or just 51% of Tuesday’s rally volume. And of that much lighter overall volume yesterday, 173 contracts traded out in September 2017 accounting for more than half of the open interest gains (265 increase) yesterday. If clues to market direction are found in price action, trading volume and open interest changes, yesterday’s weaker session is really missing the volume and open interest pieces. Because of that, we look at yesterday’s session as a down day in a volatile market as opposed to the resumption of a serious downtrend.

Cheese futures, too, had lighter 2016 trading volume (about 67% of Tuesday’s volume). Overall, however, cheese futures traded 600 contracts in total – nearly 400 contracts traded in 2017! There remains a good two-sided trade just above $1.70 for the calendar strip, and you’ll note that 193 contracts traded in the September 2017 contract alone (most likely against the September 2017 class III contract).
So the 2016 futures markets seem have overheated on Tuesday and took back the lion’s share of those gains yesterday amid bearish milk production chatter. But as we’ve said over the past few weeks, if the U.S. market is to stabilize and go higher at all in the near-term, it will not be because of milk production figures but rather – demand.

We know there is cheese out there willing to come to the market and we’d expect the same again today. But from a more medium-term directional forecast, we’ll defer to the barrel market chart. The barrel market has given up just over 60% of this summer’s rally as you can see below. From a technical vantage point, we expect that the barrel market is in the process of putting in a bottom and should move back towards the mid-$1.60s in the next few weeks. Futures are already figuring this type of move.


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


Class IV, NFDM & Butter

The butter market finished modestly higher yesterday on 101 contracts as spot butter moved up 1.25 cents on 6 trades. The futures market looks a little oversold and poised to make at least a modest rally as we close out the week. Psychological support is still a key feature for butter around the $2.00 level throughout 2017.

NFDM continued in weaker fashion yesterday albeit on much lighter volume. Just 71 NFDM contracts traded in what essentially looked like follow-thru selling from Tuesday’s declines. We expect a mixed trade for NFDM early today. We look for Butter to open steady/higher and NFDM and Class IV to open mixed.


Corn futures bounced within a tight trading range yesterday as the pull of the weaker beans played against the smaller yield expectations for corn.  The harvest continues in the east while just getting back underway in the west after several days of rain.  Corn yields in the west have been reported at below 2014’s record levels leading the marketplace to slowly downgrade expectations for the October 12th production report. 

Soybean contracts tumbled lower as numerous reports of exceptional soybean yields weighed heavily on the market despite the USDA announcing several export sales, 120 tmt to China, 118 tmt to Taiwan and 126 tmt to unknown destinations.  The series of strong yields reported will now have the market contemplating a national yield with plenty of upside, with the potential to limit upside price potential heading into the October 12th report. We look for the grain complex to start the day lower.


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