Dairy markets: Class III futures lag global downturn

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Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.

Put another notch in the belt of the Class III bull, as it continues to show swagger regardless of popular consensus or what the international market has to say about it. Additional upside premium was tacked on yesterday, all the way through October 2015, after the cash market did little in the way of providing direction. We’ve been fielding a lot of questions, and various degrees of disbelief as to the resiliency being displayed and where this market is inevitably headed.

From a fundamental standpoint, the market rallied late last year because of insatiable international demand, which initially depleted global inventories and eventually forced interest into the U.S. arena. This is why our prices lagged on the way up, and also why we continue to experience the residual effects at lofty levels.

The reverse dynamic is now in play, as international prices have tumbled, due to large entities such as China currently sitting on surplus product, and subsequently slamming the brakes on purchases. Their absence from the scene has not gone unnoticed by foreign markets, seemingly just ours. Hence, and as previously mentioned, this can be attributed to the lag factor, as we have yet to rebuild inventories from the torrid pace at which we parted with them. In other words, we were in pursuit on the way up, and the same will likely be the case on the way back down, once these inventories are replenished.

There are wild cards at play here that will help to clarify the timeline of the inevitable.  Domestic production has proven lackluster thus far in 2014, and the rebuilding of inventory levels have suffered as a result. Other contributing factors to the long life of the bull are the California drought and water crisis, the forecast of an El Nino event and the uncertainty of its severity, the strength of the butter market resulting in surplus milk being diverted to Class IV, and spot cheese prices that have been reluctant to fall below the $1.95/lb. level, which it hasn’t done since late 2013.

 

July 29 spot session results:

Block cheese: $1.9800 (up 0.75¢)

Barrel cheese: $1.9475 (unchanged)

Grade A NFDM: $1.6750 (unchanged)

Butter: $2.5250 (down 4.5¢)

 

Today's expectations:

• Class III to open higher

• Class IV to open steady

 

Grain futures

Easing weather concerns and technical resistance brought wide downward pressure to the grain market. December corn fell 5.75¢, to $3.71/bushel. November soybeans had rebounded off recent lows over the past few sessions, but were unable to continue the advance, retreating to $10.95/bushel.

 

Today’s expectation:

• Corn to open lower

• Soybeans to open lower

 

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