Dairy markets: Choppy markets can be misleading

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Class III, Cheese and Whey

The dairy complex opened mostly lower Sunday night on the heels of a heavier than expected June milk production data released late Friday.  Class III posted losses of 10 to 20 cents on rather heavy Sunday night volume and the pressure continued until Monday’s spot session.  But steady bids in both the blocks and barrel market underpinned the futures trade and prices hovered near unchanged to slightly higher in the nearby months by the final bell.  All told, just over 1,200 class III contracts exchanged hands while open interest jumped by over 400 contracts.  We suspect that the lion’s share of that open interest increase was that early selling Sunday night into Monday morning.

Cheese futures saw similar price weakness turn more stable by Monday’s close.  415 cheese futures exchanged hands while open interest jumped a rather impressive 262 contracts.  Here again, the activity seems to be driven in earnest by sellers who started early this week and slowed their activities as the cash market stabilized trading for the day.  

Dry whey futures couldn’t escape what appears to be fresh selling either.  Dry whey futures fell as much as 2.25 cents lower under heavy trading.  143 contracts traded with open interest rising by 92.   We’ve heard that condensed dry whey is rather abundant right now, but the other situation is that the NFDM is once again under price pressure.  We find that dry whey will ultimately move lower amid continued weakness in powder.

Choppy markets can be misleading and in this case class III/cheese futures qualify on both counts lately.  The trade realizes the rather counter-intuitive US domestic demand at perceived lofty price levels.   The trade is also grappling with the skyrocketing price of butter.  But market participants are also coming to realize the longer-term picture is changing.  World prices are weak and becoming weaker and feed costs are down and falling.  These are two critical issues that have only provided a mild headwind to the market so far.   But we see these issues as serious threats to the price levels of not only cheese, but the dairy complex in general moving forward.

We look for Class III, Cheese to open slightly higher and Whey to open mixed.

 Class IV, NFDM, and Butter

Spot butter took center stage today as the spot price increased by 3 cents to $2.51 – a new high price for 2014. What’s more amazing is that this price level is achieved with global fat prices at materially lower levels.  Ironically, we’ve spent the better part of two years talking about how keyed into the global pipeline our U.S. markets have become only to have such a dramatic difference in price make previous correlations seems almost unrecognizable.  Still, butter futures may hint at something different.  Other than August, which traded limit up as we start to price that month this week, butter futures had a lackluster response to spot price strength.  The market finished steady to 1.00 cent higher on modest volume, but no barn burning rally.  Perhaps prices will respond to another uptick in spot prices today.  But for now keep in mind that the futures market is acting very sluggish with spot at the $2.50 level.  That is a shift in pattern from how futures have responded to days of spot strength by and large over the past several months.

While butter finished in positive territory, NFDM grinded lower still Monday.  Both spot and futures fell amid continued soft conditions in the county.  Those with powder to sell are becoming more aggressive recently as NFDM demand is scarce at in the $1.70’s.  The NFDM looks poised for more weakness before we get to a level of renewed demand.

Class IV futures sided with NFDM despite the spot butter market strength.  Prices settled between 5 higher and 20 lower on light volume.  We expect to see a choppy, two-sided trade today, but ultimately powder is providing a lid on class IV.

We look for a class IV, butter and NFDM to open steady slightly lower this morning.

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