The much anticipated January Cattle Inventory report was released yesterday afternoon with a little something for everyone. Heifers expected to calve are only down 1.1% from last year, which was not a record decline despite a growing belief that a systemic heifer supply problem exists. HOWEVER, the USDA revised down last year's heifer supply from a 2% decline to a 7% decline, which goes a long way to explaining how the herd continued to drop in the second half of 2023 despite very strong slaughter. The drop in 2023 was a record large drop (although data only goes back to 2003). This report gives us a nice overview but will likely have little impact to dairy market trading as is perennially the case.
*On a side note, the 7% drop in 2023 looks a little suspicious and it is possible the USDA has changed methodology. We've reached out to get some clarity and make sure we are interpreting the data correctly but haven't heard back from the USDA yet
Class III and Cheese futures started mostly lower Wednesday initially on some follow-thru weakness from Tuesday’s weaker close. We continue to hear more mixed comments around cheese. There seems to be some bit of tightness in the country around the barrel market, but you wouldn’t know that by looking at spot. Sellers continue to be relatively aggressive – mainly for barrels (down a penny to $1.52 on 4 trades), which launched a wave of Class III/Cheese futures selling particularly in the nearby contracts. In fact, midday the nearby March contract gave up about 50% of the prior 4-day price gains. As we mentioned in our report yesterday, however, we think a solid ‘buy the dip’ sentiment exists in the derivative markets today and that at least played out to some degree yesterday. Futures prices recovered, well off their lows, but still closed modestly lower on the day.
While Cheese battles some headwinds this week, Class IV, Butter and NFDM futures all moved mostly higher to close out January. Spot butter actually fell yesterday – down 3.75 cents on 2 unfilled offers. No doubt the ‘buy the dip’ mentality is at least a marginal feature for the butter futures market lately, and nearby futures prices are still running a modest discount to spot, but it appears the spot market has adjusted “enough” for the time being. We may now find ourselves on a bid-finding mission, so there is potential for more spot weakness here in the short-term.
Spot NFDM opened and closed unchanged at $123.000 – the high end of a 4-month trading range. Futures were a little buoyant again yesterday as buy side order flow remained good mid-week. And volume remained robust yesterday. When the closing bell rang, 502 NFDM contracts changed hands and open interest rose by 331 (when you ignore the January OI increase). Similarly butter futures saw another day of strong trading volume with 449 contracts trading and OI up 186. Both contracts are, in our view, consolidating around current levels now and will likely need something more to continue higher. Butter specifically runs the risk of some downward stabs on futures prices short-term.
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