Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
The path of least resistance was to the upside for Class III and cheese futures on Wednesday, but trading volumes slowed. Just 696 Class III contracts exchanged hands; 453 for cheese futures. While short-term technical indicators pointed to some strength this week, a largely stable spot market has aided the recent bounce.
Market participants are also waiting for a host of information from USDA dairy reports to be released this afternoon. FCStone is looking for U.S. milk production to have increased by 3.3% in December, which is a strong showing, but generally near the lower end of expectations. We’re also looking for the Cold Storage numbers to show growth in the cheese category, but expect December’s butter inventory levels to fall short of last year for the 14th consecutive month.
Both dry whey and NFDM also saw an uptick in prices. These markets are adjusting slightly from posting new low prices over the past week or two. The news remains bearish of both products, as heavy inventories continue to weigh on spot deals.
Butter futures were the standout on the dairy complex yesterday, as prices dropped slightly amid modest trading volume. Spot seems to be well-supported for the time being in the mid-$1.50/lb. level, but with little impetus to push the price higher, sellers chipped away at the forward curve. We expect more of a mixed trade for butter today. So far, the market is starting off firm.
In light of today’s release of the December Milk Production report, we’ve received several questions around the U.S. dairy farm response to the grim price outlook. We can say that outside of sentiment, bearish market signals have not reached U.S. producers – yet. Many have not yet received a bad milk check. Producers have also deferred 2014 milk checks, paid forward feed lines, and increased their use of dairy and livestock derivative market hedging to insulate themselves. As it stands, many producers may not feel negative profit margins for several months.
Jan. 21 spot session results:
Block cheese: $1.4750 (unchanged)
Barrel cheese: $1.4500 (up 0.5¢)
Grade A NFDM: 95.0¢ (down 0.25¢)
Butter: $1.5500 (unchanged)
The grain complex traded slightly higher overnight, as the U.S. dollar flirts with weakness. We see some end-users of corn having bought some spring needs on the recent dip, which has helped underpin prices over the past few trading sessions. But, bullish news is in short supply, so we look for corn to edge lower again. The seasonal switch from U.S. to South American soybean demand from China continues to put pressure on soy prices. Generally we expect another weak day for the grain complex.
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