Morning Dairy Comments, 10/03/2016

Monday, October 03, 2016

General Market News

· Hurricane Matthew less than 24 hours from catastrophic Hati strike: hurricane warnings in Jamaica, Cuba and Bahamas

· The Bear Market in Butter

· Strong Kiwi could hit star exports

· New Zealand dairy industry worries over changes to Canada’s pricing plan

· Tesla reports its best-ever quarterly vehicle sales

· Cabela’s stock soars after $5.5 billion buyout deal with Bass Pro Shops



Class III, Cheese & Whey

Class III and cheese futures closed a weak month on modest strength Friday. Futures bounced slightly as the barrel cheese price moved back over $1.50. U.S. milk production and cheese inventory levels continue to be a weight on market prices. Spot market losses in September were significant, no doubt. The block cheese market lost 18.75 cents this month while barrel cheese has seen a 24 cent trading window and remains nearly 20 cents below September’s high price print. Although initially very reluctant, both class III and cheese futures finally reacted to the reality of $1.50 cheese during September.

The October to December class III price average dropped by nearly $2.00/cwt since September 7 when futures posted their high for the month. Q4 cheese futures have fallen on the order of 18 cents this month. Looking out into next year the weakness was not as pervasive as you might have guessed. The January to December Class III pack has lost about $0.45/cwt this month to settle Friday at an average of $16.14. The calendar 2017 cheese futures pack, on the other hand, only lost about $0.03/lb. to finish at $1.6960 Friday. We expect Jan-Dec support to come in around the $16.00 level for class III and similarly the $1.70 number appears rather agreeable for cheese now.

The U.S. dollar continued to chop sideways in a rather narrow range last month. With the Federal Reserve not moving on interest rates in September (and likely holding off until 2018) the potential for some level of U.S. dollar weakness is a real factor to consider. A weaker dollar will likely usher in some commodity price increases that come as a result of a weaker US dollar. The strongest correlations between the dollar and commodities come in the energy sector (primarily crude oil). And currently, crude oil looks poised to rally after September’s choppy trading action. If this is realized, we expect crude to sail thru $50 on its way to $60 or $65/bbl. We don’t know exactly what type of impact this would have on the price of cheese in the short-term, but a $10+ rally in crude oil would likely be a supportive aspect to commodities as a whole and something you ought to consider if you’re a cheese buyer.

December Light Sweet Crude (WTI) – Weekly Chart


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


Class IV, NFDM & Butter

The spot NFDM market fell 1.75 cents on Friday on 3 trades. The NFDM futures were under moderate pressure as the premium on the forward curve erodes with cash markets trading consolidating.  Central and Western mostly prices moved higher at 94.50 and 95.50 cents respectively. German quotes up 45 to €2,085, French unchanged at €2,000, and Dutch up 20 to €2,030. The domestic market feels in balance as there is good seasonal demand from the bakeries and NFDM manufacturers are said to be comfortable with their inventories. Export inquiries from Mexico remain active. Although the domestic end users are still skeptical of the price increases as of late and are not aggressive chasing the market higher. There is still plenty of cheap condensed skim floating in the market from the East. Also there is still a significant amount of aged product that consistently hits the market as cash and carry trades are being unwound.

Tomorrow’s GDT will feature 18,775mt WMP, which is down 2.5% from last auction but right in line with the forecast. Some of the WMP volumes have shifted from the deferred contracts and into the nearer term contracts 2 and 3. NZ SMP volumes see a big reduction from last auction down 16.8% or down 1,450mt, although the volume is still in line with forecasts at 7,175mt. Both SMP and WMP forecast volumes for the next 3 events and 12 month period are unchanged.

The spot butter market fell 1.75 cents to $1.8975 on Friday with no trades. The butter futures were again under decent pressure with the weakness in cash values. Butter end users are cautious as the market has moved lower counter seasonally from $2.25 in August. It’s thought many end users have covered their needs earlier in the year to protect against another Q4 rally to 2015’s high of $3.135. Although with everyone being proactive this year securing their needs that has limited the element of surprise this year, and the reduced the need for a big short covering rally. Butter manufacturers are confident that the high inventories will b eaten up by the Q4 demand. Do remember the USDA Dairy Products report will be released Wed afternoon. It’s expected more cream in California made it into the churns vs last year in August.

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


It looks more and more as if the harvest lows are in the corn market. The USDA Sep 1st stocks report offered few surprises and revealed a 1.738 billion bushel carryout modestly below the 1.754 trade expectations helping to bolster futures prices to close out the month and quarter. The market cares about the massive harvest underway and the impressive yields being reported especially for soybeans, but prices remain resilient and that is a telling story right now. There is, however,  a rather large counter-weight to the “harvest lows are behind us” argument.

China continues to struggle to find homes for its estimated 200 million MT of corn in reserves, some as old as 4 years old. On Friday only about 4,000mt of the 2.4MMT were sold at the auction. Auction values for corn are near $6.00/bu compared to import values near $4.80/bu. This is a big disparity and some end users will naturally buy imported product for pricing and the quality.
Also, news wires broke on Friday that China has authorized 2MMT of corn exports for next year. The Chinese have largely been out of the export market game since 2007. 2 weeks ago China also announced they will slap a 33.8% import duty against US DDG exports effective immediately. This again looks like an attempt for the Chinese to protect their domestic market. See the chart below for Jan-July exports, the Chinese exports are down well below 2015’s pace although US exporters are doing a good job moving the product to other markets. Nonetheless these moves by China signal that feed prices will likely stay depressed as DDG’s will likely substitute for other proteins like soybean meal.



We look for Corn to open 1-2 lower, Wheat 2-3 lower and Soybeans 1-2 higher.


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