Morning Dairy Comments, 12/27/2016

Tuesday, December 27, 2016

General Market News

· U.S. Rig Count Rises for Six Consecutive Weeks

· Natural Gas Stockpiles Will Make All The Difference

· FDA under pressure from dairy industry to regulate alternative milks

· Gold posts longest run of weekly losses in over a decade

· Market Outlook: New Expectations Set the Tone for 2017

· The rocky road of China Mengniu Dairy



Class III & Cheese

For a week marked by last minute gift buying and holiday parties, last week was also chalk full of dairy news with the GDT, Milk Production, and Cold Storage. The GDT index were down on average 0.5% as a whole. Rennet Casein showed the most strength, rallying 3.3% vs. the last event, followed by Buttermilk Powder +3.1%, and Cheddar +1.3%. Contract 5 (May 17) for Cheddar gained 17.2% to a USD/lb. equivalent of $2.0412, creating quite a carry premium in the forward curve; likely the result of buyers becoming more aggressive beyond Q1 as coverage out that far is reportedly sparse.
Tuesday’s Milk Production report was slightly bearish compared to estimates, climbing 2.4% vs. November 2015. We projected a 2.5% increase in production. However, we expected this increase on flat cow numbers. Instead, the U.S. added 4,000 additional head.

Friday’s Cold Storage report was likely the most bullish piece of news we got last week and likely the least important to current price direction. The report showed a seasonal draw down of total U.S. cheese stocks. Both Total and American cheese stocks fell 3+ percent versus October, with the largest drawdown seen in the Other cheese category. The 10-year average change from Oct to Nov is down 2 percent, making Friday’s report net supportive in nature.

When the dust settled, Class III and Cheese futures finished lower on the week. Part of this likely driven by somewhat lackluster news, but more likely last week’s trade was the result of weakness on the spot market. The weekly average for blocks shed 3 cents to $1.735 and barrels fell 8 cents to $1.60. We think this is more seasonal in natural rather than a reversal in trend. That being said, more spot weakness may persist here on this shortened holiday week.
The January to December dry whey average is now 45.20. As we said before, historically dry whey doesn’t spend a lot of time around the 40 cent level – it either moves lower or higher within a few months of hitting the 40 cent mark. In this case, the dry whey market has superseded our expectations in its ability to move north of 40 cents rather quickly.  Ultimately, the support from dry whey (which we expect to continue) is supportive of dairy in general – but class III can still move lower as both class III and cheese are still in corrective mode to kick of the last week of 2016. 

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



Class IV, NFDM & Butter

If there was a time to be bullish powder during the last 2 years, now would be that time. Spot NFDM is still consolidating around $1.00 after having pushed decidedly above last week. And, for the first time since Oct 2015, the weekly average spot price for NFDM closed above $1.00.
An improving crude oil market should aid in powder exports to the Middle East, which have already been reported as improving. Middle East buyers are thought to be sufficiently covered for the first few months of 2017 but not much beyond that time. Supporting the market now until than could be Chinese buying, but beyond that time we may see the world bidding for powder in a much more aggressive way. The early Chinese New Year seems to be incentivizing buyers to seek coverage earlier this year.

The weekly spot butter price was up 12 cents last week to $2.225/lb. The average winning price on the GDT was up 0.5%. While the Dairy Market News reported a slight drop in cash butter prices in Western Europe, which now stand at $2.125/lb. The domestic and international market remain firm for fat, as shown by Friday’s cold storage report which showed a 29% draw down in stock vs. October 2016, compared to 5 year average of -26%. A pullback going into the New Year should not come as a surprise however, as exports, specifically to Canada should slow down significantly with the passing holiday demand. 

We look for a lower opening for Butter, mixed for NFDM and Class IV.


Corn traded in a tight range last week, as Argentina’s corn planting progress is failing to keep pace with historical averages. Rains over the weekend should further delay progress. Cattle on feed reported numbers were 99% vs. last year, with placements at 112%, making the USDA’s projection of a 10% yoy increase in feed usage seem lofty. Rains in SA surprised the bean complex last week. However, bean futures are experiencing double digit gains in the overnight. This is more than likely a technical bounce, as futures have been under pressure for 2 weeks.

Calls are for a higher opening for the grain complex this morning

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