Dairy markets: Butter continues to shine

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Class III, Cheese and Whey

Competing forces pushed and pulled on both class III and cheese futures yesterday resulting in a modestly mixed trading session.  Initially, a bearish Global Dairy Trade auction (GDT) helped push both class III and cheese futures lower by delivering another round of broad-based international price weakness – down 8.9% in aggregate for the event.  But then another firm US spot cheese call that followed allowed the futures to find some footing and largely shrug off GDT price declines.  When the dust settled prices were slightly higher nearby and only modestly lower thru year-end and into next year.

US cheese prices again seem to be operating on their own accord.  Buyers have been ready willing and able at or very near to, $2.00/lb. for the better part of two months and we don’t see that changing just yet.  As consensus of market participants has pegged a floor of sorts in the mid-$1.80’s for the balance of the year, buyers still see their greatest price risk being to the upside for the time-being.  Are they right?   Only time will tell. But GDT is potentially the biggest harbinger we have for the future condition of the US market prices we have right now and it is showing more weakness than strength lately.  

Although the class III and cheese markets largely shrugged off GDT price weakness yesterday, we believe that eventually block/barrel pricing will make their way towards weaker world prices.  But “eventually”, in our estimate, still has the potential to be several weeks or months into the future – not necessarily today or tomorrow.  The million dollar question is then: can international demand and price recover before US buyers step aside?  And, even if that does happen, how does that potentially coincide with more fresh milk out of competing global milk sheds?

Dry whey futures traded 64 contracts in a mixed fashion Tuesday after having shown new strength thru year end lately.  We expect a mixed trade here from current levels as recent price strength doesn’t necessarily correspond with what appears to be a significant imbalance of supply/demand in the country.  In other words, inventories of dry whey seem more than adequate at this time. 

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

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Class IV, NFDM, and Butter

Class IV futures were again caught in the crossfire between a sharply higher butter futures trade and powder weakness.  GDT pushed butter prices lower, but it took the gloves off for powder.  SMP fell 7.1% and WMP fell 10.9%.  Although volumes were lighter in general, price direction reflects anecdotal sentiment and together it is weighing on US NFDM prices.  NFDM futures closed mostly 0.500 to 1.000 lower on 151 contracts.  Open Interest also rose by 90 contracts.  While we expect a small portion of that is commercial buy side in nature, the takeaway is that sellers are comfortable dialing up their short positions at current levels. 

Perhaps there is no better dairy product market to exemplify the disparities between US and world prices.  Butter continues to be the bright light of dairy market bulls.  Spot edged 1.50 cents higher again yesterday and once again deeply discounted futures covered ground with the spot price closing limit up in both August and September.  Cream demand is still strong and we expect butter prices to push once again to $2.50.  The question is whether or not it will stop there.  We don’t see butter strength staying around through year-end, but we’re still very much in the throes of a bull butter market - one that has little problem shrugging off bearish world news and moving higher. 

We look for Class IV and NFDM to open steady, Butter steady to lower.

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