Note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
July 8 spot session results:
Block cheese: $1.6525 (up 1.0¢)
Barrel cheese: $1.5900 (up 1.5¢)
Grade A NFDM: 82.00¢ (unchanged)
Butter: $1.9200 (down 0.5¢)
Class III and cheese futures were not convinced by a higher spot market yesterday and, with the exception of the July contract, values for the balance of 2015 and well into 2016 were pressured into the red. The divergent nature of the trade is telling. in that market participants will likely need to see a sustained move higher in spot prices to warrant a change in futures sentiment.
Granted, we’re now in a post-flush time frame, and would expect milk production to ease a bit moving forward. However, it’s downright pleasant here in the Midwest and milk production continues to be strong. The West also didn’t get slammed with the forecasted heat and, although there’s been little improvement on the drought front, milk receipts out West are still adequate.
Let’s consider the recent price action we’ve witnessed from a margin perspective. Despite the recent uptick in crop ratings, the grain markets are telling a different story. The entire complex had rallied sharply ahead of the June 30 USDA Acreage and Grain Stocks reports, and has held relative value since. There remain weather concerns for grains, and if this rally turns out to be sustainable, there will be real ramifications concerning the dairy industry moving forward, as margins will get pinched if milk prices continue to slide. That could be the turning point however, as s signal would be sent for a cut in production levels.
We’ve been fielding quite a bit of phone traffic with questions about Greece and China and the ramifications for dairy. Speaking to that, we have to acknowledge that the markets had factored in much of the bearishness already, as indicated by where copper, silver, crude oil and NFDM are all trading … at or near multi-year lows. It’s not that prices couldn’t move lower from here, but it would likely take an escalation of this global economic calamity to spark such an event.
Futures outlook: We look for Class III, Cheese & Dry Whey to open mixed to slightly higher.
Class IV futures traded mostly lower on thin volume, as the NFDM market got a much-needed respite from the chronic selling pressure. Though futures were mixed, the deferred months from Q4 through mid-2016 remained quite buoyant and posted gains on solid volume. Commercial buyers seem interested in gaining coverage well into 2016, but also nervous about “grabbing a falling knife.” We’re not calling a bottom yet, but with the first half of 2016 at $1.05 average, we would like to point out that the knife has likely fallen most of the way.
Butter futures traded steady to lower on the heels of a soft spot session. As the spreads between spot and futures narrow, the sentiment around the butter market turns slightly more negative. Cream demand and pricing has and remains strong, but worries around not having enough bulk butter are waning. As the sentiment shifts, downside potential is expected. For now, however, the market still seems content to trade around the $1.90 level.
Futures outlook: We look for Class IV & Butter to open mixed; and NFDM lower.
Grain futures
Grain markets traded mostly in the green, with the exception of wheat. Corn and beans turned in performances that could be construed as sharply undecided. Ethanol production increased to 987,000 barrels per day in week ending July 3. versus 968,000 the previous week and 927,000 previous year. The record is 994,000. The trade will take a look at export sales numbers, scheduled for release this morning.
Futures outlook: We look for a slightly higher open to the grain complex.
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