Morning Dairy Comments, 09/29/2016

Thursday, September 29, 2016


General Market News

· OPEC agrees to cut oil production driving prices higher https://goo.gl/ZwouhT

· Rabobank says NZ milk price could hit $6 next year https://goo.gl/QByoTA

· Fonterra increased the volume of butter (+35%) and AMF (+9%) to be offered during the next GDT auction

· Australia’s WCB announces milk price rise https://goo.gl/hP5Mlg

· China slaps anti-subsidy duties on U.S. DDGs https://goo.gl/7z8IbK

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Class III, Cheese & Dry Whey

Class III futures pushed 1 to 24 cents higher in the September through November 2017 contracts yesterday as spot block and barrel markets managed to absorb aggressive selling before closing modestly higher. After 3+ weeks of spot value declines, the cheese cash market appears to be in the process of putting in a complicated bottom right now. Even after yesterday’s bounce, class III contracts are still perched near their lowest levels since early June as the market has enacted a counter-seasonal trade here in September.

The EU Commission yesterday released the update of the Aid Scheme for Milk Production in Europe. The scheme which was announced as part of the EU package to support European livestock farmers and had funding to support the reduction of 1.1 million tonnes of milk during Q4 2016, with aid of €14/100kg of milk supply reduced vs Q4 2015. Fully realized the reduction would put EU milk production for Q4 down 2.9% on 2015.
This is not a cow attrition program like we’ve seen in the U.S. before.  Many producers will likely dry off cows a little earlier than normal to fit within the program parameters.  More importantly, milk volumes across the biggest EU producers are already running below last year, and many producers are looking like they will already be down in production. There is also no penalty for the farmers not meeting their individual reduction forecasts (apart from not getting the payment), so there was no disadvantage for any farmer to apply.  Where this gets tricky is that European milk production was exceptionally good in Q4 2015, so losses this year were generally expected anyway.

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Both the market bulls and bears have plenty of theories, ideas, fundamental and technical reasons to support their cause. We could list a myriad of points to support either side of the market today. That, in itself, should be evidence enough that the Class III and cheese markets should experience increased price volatility in the days and weeks to come. 
The great mystery of where these markets are headed should prompt both producers and end-users alike to take stock of their unique situation and devise a place. Leave hopes and whims out of your decision making process and prepare to gain some level of price stability going forward. Presently, we see this we see the recent class III/cheese weakness as an excellent buying opportunity for those commercial hedgers who are looking for additional coverage for the balance of 2016 or need to set initial budgets in 2017.

The NDPSR for the week ending September 24th posted with the Block cheese price at $1.7239, down 3.60 cents from the week prior, while sales were estimated at 11,292,923 pounds, down 13.5% week over week.  The Barrel cheese price fell 8.14 cents to $1.6413 while weekly sales grew by 7.5% to 10,757,116 pounds.  The dry whey price gained 0.26 cents to 30.97 while weekly sales increased by 5.4% to 7,179,017 pounds. 

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

 

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Class IV, NFDM & Butter

Class IV futures remained relatively stable with just three contracts registering price declines on the day as the firm price action of the butter market played against the declines of the NFDM.  The October 2016 contract fell 11 cents while the November and December contracts eased a penny lower with nearly 50 contracts changing hands. 

The butter futures shook off the penny and a half decline tallied during the spot session as the September through January months settled 0.025 to 1.000 cent higher.  Despite the third consecutive session of falling spot prices it seems that buy side interests are willing to set aside the notion that the U.S. holds significant volumes of butter in inventory to capitalize on the roughly 17 cent decline through the month of September within the fourth quarter futures contracts.  Demand for butter is growing ahead of the holiday season allowing some processors to opt for the selling down of current inventories while others continue to churn more. 

EU weekly butter prices continue to drive higher, as seen in the chart below.  Taking the latest weekly price of 391EUR/100 kg and converting this to Dollars per pound yesterday’s supportive trading action is logical as the EU butter price equates to $1.9922/lb.  Despite the obvious glut of inventory on hand there are numerous buy side interests that must still address their impending needs for the fourth quarter and should provide a measure of support to the market.

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The NFDM market drifted 0.250 to 1.400 cents lower in the September through March 2017 contracts as the spot market remained idle at $0.9525.  The October contract has repeatedly been rebuffed by the resistance levels that have hovered below the 98 cent level throughout this month while the November is trapped in the midst of the quagmire that its recent five-day trading range, capped by resistance derived from its 100-day moving average currently sitting around 101.500 and support provided by the 20 and 50 day moving averages hovering around 100.000 and 99.750 respectively.  Without a resurgence in the spot value these nearby contracts looked destined to grind along into support. 

The NDPSR for the week ending September 24th posted with the butter price falling 3.08 cents week over week to $2.0342 while weekly sales increased by 7.5% to 2,483,685 pounds.  The NFDM price increased by 0.47 cents to 90.22 while weekly sales fell 14.2% to 13,481,957 pounds. 

We look for Butter, NFDM and Class IV to open mixed.

Grains

Corn futures surrendered early session gains as intraday fund activity shifting from the buying in the morning only to double down on their selling efforts in the second half of the day.  The harvest is advancing with reportedly good yields while the flood waters of NE Iowa are receding with a lesser impact on the region than anticipated. China has announced a 10.7% anti-subsidy tariff on DDGs adding to the prior 33.8% import tariff on the product which now has domestically produced ethanol on par pricewise with imported ethanol which will lead to declining imports.  India though has stepped up their ethanol imports dramatically, as their 2016 imports year to date have already exceeded their total for all of 2015.  Funds were credited with selling 5,000 contracts on the day.

Soybean values were pressured lower on continuing reports of record yields in the Midwest and weakness in the overseas vegetable oil markets.  Improving long term weather forecasts are calling for increased rainfall coverage and accumulations for the dry northern belt where there still exists a significant soil moisture shortage.  Funds were estimated to have sold 5,000 soybean and 6,000 soybean oil contracts.  

Futures were mixed for the winter wheat while the spring wheat market moved higher as additional rains are expected during the final days of the Canadian spring wheat harvest, with the crop rumored to be of subpar quality which would shift export demand to the U.S.   

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We look for Corn to open 2-3 cents higher and Soybeans to open 6-9 cents higher.

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