Morning Dairy Comments, 11/15/2016

Tuesday, November 15, 2016


     General Market News

· GDT Auction today

· New Zealand dairy industry assesses damage after earthquakes https://goo.gl/5rstQr

· Australian infant formula maker banned in China https://goo.gl/m0BkBt

· Trump transition mem: trade reform begins Day 1 https://goo.gl/6C9pw9

· Cow manure turns to biofuel at a California dairy https://goo.gl/eHGURm

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Class III & Cheese

Friday’s correction seemed to satisfy the market as Monday traded mixed to slightly higher even in the face of lower barrel prices.  Technically class III and cheese futures are consolidating recent gains as they continue to trade at a discount to spot. 

A slowdown in volatility yesterday could also be coming from the earthquake early Monday morning in New Zealand and its uncertain psychological impact on GDT today (more from our EU dairy team later in the update). The earthquake, while devastating to areas and people of the South Island, seems to have a limited impact on the world of dairy. Fonterra says none of their facilities were impacted. It sounds like electrical outages may delay or cancel some milk pick-ups but not much more than that has been reportedly impacted. We think it’s net supportive for prices there, but not dramatically so (See comments below).

There is some increased chatter around exports as the US Dollar turned around last week following the presidential election. The dollar index is not doing the dairy export business any favors by continuing to rally to multi year highs, which hinders our ability to export. If global supply continues to contract, we can envision a scenario where export business continues to pick up even in the face of a stronger dollar. A stronger dollar makes the prospect less likely, but currency is not the only consideration in times of uncertain supply/demand.
NMPF announced today that CWT has accepted 11 requests for export assistance from DFA, Foremost Farms and NDA (Darigold) totaling 1.9 million lbs. of cheese and butter to customers in Asia, the Middle East and Oceania.
Taking a look at the January Class III contract below we see that the market has traded largely sideways over the past week or so (Blue Circle). Periods of consolidation are quite normal. In this particular case, technical indicators would suggest that when prices “break-out” of this consolidation pattern, probability favors a continuation of upside momentum for a period of time.

January 2017 Class III

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Dry whey was a supportive feature for class III yesterday as well yesterday. Nearly 200 dry whey contracts traded hands between 0.50 and 2.50 cents higher thru Q4 2017. August and September dry whey contracts are not back above 40 cents. The January to December pack average has gained about 2.5-3.0 cents over the past two months and now remains perched at 38.85. EU whey prices were last reported slightly lower but still in the mid-high 30 cent range. The US prices are firming amid good demand and a production situation that has shifted away from sweet dry whey over the past few months. Although that is expected to change going forward somewhat, the trade is pricing in some additional risk premium to the dry whey market now.

We look for Class III and cheese to open quietly lower.  

 

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Class IV, NFDM & Butter

Yesterday’s NFDM spot session opened and closed quickly with one trade at unchanged. The domestic NFDM market is relatively quiet compared to the Oceania markets. Looking at the chart below the CME’s NFDM forward curve is a $400/mt (18 cent/lb.) discount to the NZX SMP futures illustrated by the red bars. Domestic end users are not convinced that the tightness in Oceania has to spill into the US market, as there is still plenty of aged product overhanging the market. The volatility post-election has strengthened the dollar significantly making exports more difficult. The Euro has dropped from $1.11 last week to $1.0739 as of the close yesterday.

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Today’s GDT auction will feature 12,550 mt of WMP, which is down 2,050mt or -14% from last auction.  5075 mt of SMP will be offered down 250 mt or -4.7%.

Before the last auction, Fonterra lowered volumes and the 12 month forecast, citing the wetter than normal spring weather. While the SMP 12 month forecast wasn’t changed prior to the last GDT auction, it takes a significant hit this time around, with the 12 month SMP forecast lowered by 10,000 tonnes (-7.7%). For WMP the previous 12 month forecast had been reduced by 10,200 tonnes (-3.1%) and the updated forecast sees a further reduction of 3,000 tonnes (-1%), which brings the 12 month forecast to 312,190 tonnes.

The spot butter market dropped 2 cents yesterday to close at 2.00 on one trade.  Looking at the spot chart below the collective wisdom of the market suggests we need to be above $2.00 until the seasonal demand starts to wane off in the 1st week of December. The past 2 years butter prices crashed in October before finding strong support throughout November.

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We look for Butter, NFDM and Class IV to open higher in anticipation of a better GDT.

New Zealand Earthquake

A magnitude 7.8 earthquake hit New Zealand’s South Island just after midnight on Monday local time. The powerful quake hit near Hanmer Springs, 95km from Christchurch on the North West coast of the SI.

The main earthquake was followed by a series of aftershocks throughout the night, the largest of which was magnitude 6.8. The quake caused widespread disruption of the electrical grid, with large areas in the north of the SI without power and disruption to the road network with landslides and ruptured roads.

In a press release overnight Fonterra confirmed that there was no major damage to any of their manufacturing sites. Fonterra’s cheese producing Kaikoura facility (NE of Canterbury) is approx. 60km from the epicenter of the main quake and the large Darfield WMP site (west of Canterbury) 115km from the epicenter. Synlait say that their Dunsandel site (SW of Canterbury) 135km from the epicenter was not affected and is operating as usual.

Due to road conditions, some farmers in the Kaikoura and North Canterbury area may not have their milk collected as normal and electrical outages mean that some farmers will not be able to milk cows and will need to dispose of milk. There have also been reports of some rotary milking parlours temporarily out of action.

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Grains

The grain complex seemed to be ruled by weakness in world currencies or more pointedly a much stronger dollar but was able to rally off lows late in the session.  Export inspections were announced mid-morning and were disappointing for corn coming in at 618 tmt with an average estimate of one mmt.  Harvest progress was released after the close yesterday and showed Corn 93% harvested compared to the 5-year average of 92%.  December corn finished down 3 cents to 3.37 ¼.

Soybeans finished 9 cents off their lows settling down 1 ¾ cents to 9.84 ¼.  Export inspections were on the lower side of expectations but continue to show good demand.  Harvest is essentially finished coming in at 97% complete.  Soybean meal finished +1.9 to 312.10 finding support in November right at the 50-day moving average which came in at 308.7 yesterday.

We look for Corn and Soybeans to open steady to higher. Wheat should open higher.

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