Morning Dairy Comments, 07/27/2016

Wednesday, July 27, 2016

General Market News

· U.K. Economic Growth Tops Forecasts in Second Quarter

· U.S. durable-goods orders sink 4% in June, biggest drop in almost two years

· The Fed won’t hike rates despite having its ducks in a row

· At Democratic Convention, Economic Messages Reveal Tensions



Class III, Cheese & Whey

Soaring temps out West failed to prop up class III and cheese markets amid what has become a very quiet week for trading generally and the spot call specifically. We know that summer can usher in quieter trading days, but it’s not like the spot market has been an afterthought here in July. Quite to the contrary as new 2016 high cheese prices have been etched out over the past few weeks on volume. But the chatter of $1.80 or higher barrel cheddar of last week has given way to quiet as barrels have gone radio silent.

Predicting the next move is no easy task. What we can tell you, however, is that cheese prices in the mid-high $1.70s is starting to feel heavy. And with each modest decline during the spot butter call, that weight to cheese sentiment is dialed up ever so slightly. Grains, crude oil and US dollar moves over the past several weeks are not helping dairy bulls either lately. With all that in mind, the cheese market, to us, seems more appropriately priced in the $1.50s as opposed to the $1.70s.

We don’t want to overlook or downplay the impact of weather on milk production out west. With daytime temperatures in the triple-digits and overnight lows expected to remain over 70 degrees for the better part of this week (and some models say next week), we have to expect that components will take a hit and milk supplies could tighten. And, if realized, that situation may not get better until this fall. But for now we think the dairy markets have priced much of this concern into the forward curve and may be turning the focus back to inventories and demand considerations. If that is the case, we could see futures market price weakness precisely at a time when we’d expect weather to support. That is what we expect today.

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


Class IV, NFDM & Butter

Sellers got after bids in the spot butter session yesterday. While the rest of the dairy complex was rather quiet, butter traded over 200 contracts and open interest rose by 139 as futures sellers are giving up the ghost on some sort of late summer butter rally. We’ve seen the butter market defy the odds for a couple of years now, but it may not be worth splitting hairs over composition of the inventory when the USDA is reporting over 320 million lbs. in storage. One way or another we have butter, so at the risk of sounding like a broken record we will repeat what we wrote on Monday morning: We continue to expect willing sellers north of $2.30, which may eventually evolve in to those willing to sell more aggressively below $2.30. We don’t see a lot of upside for butter from current levels.

So far in July, NFDM seemed to be the most appropriately priced dairy commodity out there from a standpoint of reflecting current supply/demand fundamentals. That seems to be changing as chatter turns to demand – particularly out of Mexico - slowing down. With that chatter we’ve seen some fresh weakness for the spot call, futures and CWAP. The California Weighted Average Price fell another 2 ½ cents last week to $0.7859 – that’s down about 8 cents in the past two weeks. Futures trading volumes were modest yesterday, but those losses are being extended here overnight as follow-through selling is continuing.

We expect NFDM, Butter and Class IV to open sharply lower.


The grain markets remain very choppy around current levels and look to open firm this morning. Grain market bulls need some weather story to develop and they don’t have one yet. Next week temps in the Corn Belt will be hot once again, but rain systems continue to move through and keep crop conditions nicely elevated. The markets are still fundamentally poised for more weakness, but we may see a bit of a recovery bounce before the harvest. Once they start pulling the crop out of the ground, however, there will need to be wholesale change in sentiment to see any type of material rally. End-users ought to be scaling in to owning physical now.


We look for Corn to open 2-4 higher and Soybeans to open 12-15 higher.

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