Morning Dairy Comments, 11/01/2016

Tuesday, November 01, 2016


General Market News

· GDT underway and firming

· Oil prices rise from one-month mows after OPEC approves strategy https://goo.gl/kPRpfQ

· Stocks to open slightly higher ahead of start of Fed meeting https://goo.gl/IMUr16

· FrieslandCampina increases milk price for November https://goo.gl/rh1Ecy

· Murray Goulburn:  Co-operative eyes New Zealand payment plans https://goo.gl/mv5Lvg

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Class III & Cheese

October closed with a spot market barnburner as the price of barrel cheese jumped 13.25 cents – the largest single day gain since July 31, 2008 when barrel cheese rallied 15 cents (the largest single day decline came on January 14, 2015 when barrels dropped 15.25 cents). But it was block cheese that got the party started. Block cheese was bid first out of the gate and pushed 4 cents higher on no trades. It seems rather clear that fresh block cheese tightness is the key driver of late and barrel cheese is just keeping pace. 
The key takeaway is not necessarily in yesterday’s spot price strength, however. The key is that over the past week or so the market has undergone a significant pattern change in the spot/futures relationship. The spot cheese market is trading at a clear premium to nearby futures. Such a pricing structure is in a word: bullish. Moreover, the fact that futures prices and market participants are currently highly skeptical of the recent spot move can add to the bullishness of a market plainly “not doing what you think it should be doing”.

We can initially chalk up the cheese price rise to holiday demand. And we’re starting a new month here so there is a possibility that the spot market got a little overheated in October. There’s also the distinct possibility that additional loads of fresh cheese will shake loose now that spot prices are 25+ cents higher than just three weeks ago. And we’ve heard hours of chatter about how many buyers are already well stocked with holiday cheese. But think about this: if the spot market is an inventory management tool of last resort, does it really care about where the lion’s share of buyers covered holiday needs? No - the spot market only cares about the last guy. How much does he need and what price is he willing to pay? We’re about to find out.
Option activity was brisk yesterday. Nearly 4,000 class III options traded and over 1,200 cheese options. So while the futures volume was only moderate given the shifting trends, option activity shows tremendous activity in these markets is occurring beneath the surface of the futures board.

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

 

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Class IV, NFDM & Butter

NFDM went unchanged on spot yesterday for the 3rd straight trading day. In the absence of price action on spot, futures traded a modest 231 times, settling 0.01 to 1 cents higher. The GDT is taking place this morning. Since the last auction, cash trading has taking place above $2,500/MT for SMP in both Europe and Oceana. This is above last GDT’s contract 1 and contract 2’s settlement price, and a reason why we think SMP will show gains today.

Sometimes the laws of physics, fundamentals and technical indicators do not apply to butter. Yesterday was not the case, as gravity weighed down on the spot market, bringing the settlement price 2 ¾ cents lower to $1.8975. The change in trend pulled the rug out from under futures, sending 2016/17 contracts 2 ½ - 4 cents lower. There was strong trading volume all the way to April 2017, with Oct to Apr making up well over 80% of the total volume. There are whispers of some domestic fat making its way to exports with CWT assistance. We are expecting a higher GDT today for butter, which should also make our exports more advantageous.

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

Grains

Demand is still the name of the game in the grain complex – particularly for soybeans. Corn export inspections were strong yesterday showing 0.791MMT vs 0.485MMT last year. Corn loadings to date are up 3.9MMT over last marketing year. Soybean export inspections were impressive showing 2.87MMT vs 2.56MMT last year.

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The national corn harvest came in at 75% complete this week, up from 61% last week and even with the five-year average pace, but behind the 77% trade estimate and 82% last year. Soybean harvesting matched the trade’s thinking at 87% done, up from the 85% 5YA but below 91% last season.

South American weather forecasts show plentiful rains in the majority of the corn growing regions in the next 10 days before a break in the 11-15 day forecast.

This afternoon’s USDA Fats & Oils report is expected to show September soybean crush at 136.8 million bushels, down from 140.6 mbu in August but above 134.7 mbu last September. Estimates range from 130.0-138.8 mbu.


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