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Gobble, gobble. There was plenty of volume to feast upon in the dairy markets yesterday as market participants attempted to get their fill ahead of the holiday.

Cheese options lead the volume heavy session with over 2k trades between calls and puts. Class III and milk futures took the plunge with Class III 2016 in Jan and Feb saying say la vee to $15 and dropping into the $14’s. amidst the glut of milk in certain regions of the country, Land O’Lakes announced a largely unexpected quota to the Eastern oversupply situation. Beginning Jan 1st LOL will implement a milk supply program that aims at constricting production growth in an over supplied region by assigning watch producer a base and then charging costs associated with any increased production marketing efforts. Historically these moves in other areas of the country have signaled a turning point and this supports the idea that ~6 months out we could see a cycle shift; underpinning our idea that the 1st half of the year could be very bearish followed by an upcycle of significance.

The January 2016 cheese futures contract reflected below has been and is clearly in free fall. Where is support? We could see a bounce but inevitably we see milk sometime in Q1 having the possibility of reaching the $12’s which means cheese could see the $1.20’2-$1.30’s.

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We expect class III, cheese and whey to open lower

Spot Session Results

Type Trades Settlement Change Bid Offer
CHEESE BLOCKS 3 $1.5700 DOWN ½ 0 1
BARRELS 13 $1.5325 UP 6 ¼ 0 0
NFDM GRADE A 1 $0.7300 DOWN ¼ 2 0
BUTTER GRADE AA 0 $2.9000 UNCH 0 0

 

Class IV, Nonfat, and Butter Futures

Butter, I don’t want to even talk about butter. I do want to think about a pumpkin pie awaiting me tomorrow though and that has some butter…

Butter futures softened as spot stayed steady. The futures are pricing in discounts almost 85 cents in Jan but less than 40 cents in Dec. while flat price is a risky endeavor leading hedgers to gobble up anything near $1.90 (the newly accepted price level of interest) the spreads are of interest. We look to see spot butter come off the end of 2015 around $2.20 which means there is a good spread opportunity between Dec/Jan as well as between Jan and Feb which are only ~dime different from each other in price. The dairy world is watching out for the drop but it sure is taking its time as manufacturers are bolstered by food service demand, dropping CA production and the growing market belief that many franchise restaurants will announce in 2016 a switch out of margarine into only butter.

NFDM CWAP saw prices jump 4.6% to $0.8359 on an increase of sales volume from the previous week of 7.6% to 11,440,863. The price as indicated in the chart below has seen the fall is looks to be attempting a basing pattern.  Recent large purchases out of Mexico seem to have at least temporarily provided support but who steps in next amidst a global glut of powder? Overnight NFDM futures saw prices firm in Nov/Dec 2015 but remain soft in 2016. This following a nearly 300 contract NFDM session Tuesday in which the Dec contract fell over 2 cents while 2016 was relatively steady. End users are still happy to pick away at 2016 despite the slow decay of prices- they pretty much have to cost average in because of volume limitations and price smoothing efforts. But the 2016 premium has eroded of late and should continue to do so over rest of 2015.

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NZX trade action noted below:

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We expect NFDM and butter to open a little higher this morning

 

INTL FCStone Dairy Division offers comprehensive education, advice, and market execution to the dairy industry in the U.S. and abroad.  Please visit www.intlfcstone.com or call 800-504-5620 for more information.