US Dairy Commodity Price Forecast Snapshot

Transcription

1 US Dairy Commodity Price Forecast Snapshot

2 HG Dairy Forecast Commentary Executive Summary US CME cheese & butter prices have performed better-than-expected, particularly through the spring: Strong milk flows, heavily discounted milk and worn out cheese manufacturing workers in the Midwest aided to the surprise, but domestic Natural American cheese demand through April is projected at 8% and total cheese exports have also outperformed, down just 10.5% YTD. Regional butterfat/cream tightness in California, seven straight months of YOY butter production declines have kept a solid bid at the CME. Latest inventories are not suggestive of $2.00 butter but prices remain high as a summer premium is built in due to weather uncertainty. However, international cheese and butter prices remain at a discount to the US which we expect will limit exports, promote imports and keep the US market from seeing sharply higher prices other than a nominal seasonal bounce during US dairy products that are export-reliant have under-performed HighGround s expectations: Strong competition from overseas and an abundance of domestic production and inventory have pressured US nonfat dry milk, whey protein concentrate and lactose prices to lows not seen since NFDM global milk production growth has not yet been threatened and overall, global climate conditions have had no major impact on regional milksheds (California as the exception) which HighGround believes will keep moderate pressure on these commodities and prevent a sharp upside correction through much of Up until now, US dry whey prices have held at levels much higher than previously forecast but the recent shift in production away from concentrated whey proteins to sweet whey powder will bring prices in line on a protein equivalent basis, meaning more weakness ahead. 2

3 HG Dairy Forecast Commentary Regional Hot Spots Oceania NZ Milk Production Ends Firm; Pasture Conditions Good Heading to Winter; GDT Struggles to Find Support Milk Production update vs. prior year: Fonterra NZ YTD (June-Apr) +1.5%, Overall NZ YTD (June-Apr) +3.2% (milksolids collection), Overall Australia YTD (July-Apr) +2.9% (in total litres). As recent as February, Fonterra was predicting their milk production would end the year DOWN 3.3% due to the drought impacting portions of the South Island at the time. But drought conditions quickly changed and production ended much better than previously thought. Sources: Fonterra, DCANZ, Dairy Australia 3 New Zealand soil moisture and pasture growth conditions are very close to normal across the vast majority of the country and present few challenges for milking at the start of calving season in late July/August. The overall GDT Price Index has fallen for three straight months as Fonterra s WMP price has declined 31% and SMP down by 39% during that time frame (regular, med heat, C2 delivery). Even butterfat prices have fallen in recent weeks to lows not seen since late last year and both butter and AMF are down more than 30% since their 2015 peak. Fonterra is projecting their 2015/16 milk price to be NZ$5.25 kgms, UP 19% from the last estimate for this season but still down 39% from the all-time high in 2013/14. A $5.25 price is under the cost of production for a solid percentage of Kiwi farmers. While the NZ market may endure choppy conditions in the coming months, unless their primary customer (China) is poised to buy like they did in 2013/14 or milk production declines during the first half of the upcoming New Zealand season (both unlikely in HighGround s view at this point), expect prices to remain low and unable to find sustained support until early 2016.

4 HG Dairy Forecast Commentary Regional Hot Spots Europe The Post-Quota Era to Keep Milk Flowing & Dairy Commodity Prices Low in 2015 EU-28 milk production during the Jan-Mar timeframe is estimated to be 1.9% lower, due partially to low commodity prices during Q but primarily to slowing production in order to avoid stiff over-quota penalties. Efforts were made to slow production towards the tail end of the fiscal year (Apr-Mar) to keep the superlevy payments at a minimum. That said, expectations for milk production growth during the Apr-June timeframe are aggressive. Early reporting from 4 of the top 7 countries in April show YOY growth from the Netherlands (+1.2%), United Kingdom (+1.5%), Poland (+4.2%) and Ireland (+11.3%) though local Irish media outlets stated national milk production growth was in excess of 14%. Commodity prices remain low and continue to fall as production grows during the spring flush. The most recent Dutch SMP quote was 1730 last week, only 2% above EU s Intervention level. Strong demand from the export market have failed to provide any lift to EU prices as inventories remain robust. Butter in Private Storage Aid totaled 49,956MT (110 million lbs, +28% from Mar) while SMP in the PSA scheme tallied 14,274MT (31.5 million lbs, -8% from March) at the end of April. 4 Export volumes have been strong, particularly skim milk powder which is up 16.5%, or 35,348MT Jan-Apr 15 vs. prior year. Even cheese exports, down 12% vs. prior year (thru Apr), are impressive given that volumes to Russia have declined 74,588MT. Overall cheese export volume is down by 31,134MT.

5 HG Dairy Forecast Commentary Regional Hot Spots United States Cheese and Butter Outperform Expectations; Milk Flowing to Cheese, Just Not Cheddar 2015 USDA YOY milk production forecasts have been slashed, from 2.3% back in February to 1.3% growth in June. YTD production through May is UP 1.7%. USDA pegs 2016 production 2.5% higher than prior year, an aggressive number in HighGround s opinion. While there was some concern the US milking herd began contracting in March, April and May reports nixed that idea with monthly gains in both. Producers throughout much of the country have yet to be given a clear signal to make less milk which has helped states like Wisconsin and Michigan to grow at a pace of 3.8% and 7.9%, respectively in Even in California, milk cows are now flat versus prior year, though their overall production totals are DOWN by 2.8% due to lower production per cow - significant given they represent approximately 20% of the nation s milk. Given the large premium Class III has been carrying to Class IV and the strong production growth in the Upper Midwest, milk continues flowing to the cheese vats. But cheddar has NOT been the preferred variety. Cheddar production is only UP 1.6% YTD while total cheese is up 2.6%. And in April, cheddar volumes dipped 1.8% below the prior year, creating some tightness which helped push prices to the upper $1.70s earlier this month. Export volumes continue to impress in both NFDM and cheese. Even though cheddar exports are down 56%, overall cheese exports are only 10.5% lower vs. prior year (Jan-Apr) driven by growth in the fresh cheese category (think pizza and cream cheeses). Export volume to South Korea and Mexico are up 9,229MT or 20.3 million pounds YTD vs. prior year. YTD NFDM exports turned positive for the first time in 2015 during April volume to Mexico are up 21,940MT (48.3 million lbs) to date and Pakistan has pulled an additional 10,000MT (22.4 million lbs) of skim powder in 2015 from the US. The surprise strength in NFDM exports has done little to support that market as the US participates in a market currently in a race to the bottom with plenty of stock worldwide. 5

6 HG Dairy Forecast Commentary Regional Hot Spots United States Cheese and Butter Outperform Expectations, Continued.. 6 The volume of cheese exported in the US only represents 6.8% of the total produced (Jan-Apr 15) which means the domestic market can carry a greater impact on price. And it has. Total cheese commercial disappearance is UP 4.1% Jan-Apr 15 vs. prior year and being driven by Natural American cheese (Cheddar, Colby, Monterey Jack) which is 8% higher! That strong demand has helped keep cheese prices from falling to the lows HighGround had expected earlier this year. Elevated butter prices remain a mystery as inventories from last month s Cold Storage report indicate stability and not tightness. Here is our theory as to why prices are as high as they are today: Butter production has fallen behind year ago levels for four straight months. That represents 19.5 million pounds (8,847MT) less butter. Cooperatives and butter manufacturers found alternative (and more profitable) sales channels for cream and have slowed butter production Cream availability differs based on regional milkshed East and Midwest have been struggling to find homes for milk at steep discounts while in the West (particularly CA), finding any loads of cream has been a challenge as cooperatives and ice cream manufacturers scoop up excess. With CA milk production struggling to find its footing (extreme drought and low Class 4a prices), it should keep cream tight throughout the summer. Butter is in strong hands: With April ending stocks at 230 million pounds (104,524MT), there is no shortage of butter. But perhaps the uncertainty has convinced those holding butter to keep it close instead of offering it out. Buyers that had just endured $3.00/lb ($6,614MT) butter in September only to miss the narrow window in the $1.50s in January came to the market aggressively over the past month to lock in hedges. That said, the summer months are here which tends to create weather uncertainty. And that uncertainty almost always favors upside risk (heat/humidity reducing milk components). Therefore, a weather premium could remain in the domestic market over the summer months. But it is HighGround s view that an upside breakout to make fresh 2015 highs is unlikely.

7 Risks to the HighGround Forecast Upside Risks Upside risks remain very similar to our last forecast report but there have been a couple of additional caveats added to weather. Summer in the Northern Hemisphere tends to bring plenty of uncertainty; and very few times in history does that translate into significant downside risk. Weather: Climate concerns just got more interesting as multiple meteorological agencies around the world called for a significant El Nino event this year. The impact tends to be a dry Australia, potential disruptions in moisture in parts of South & East Asia and wet, cool weather into Central/Southern United States during the summer. So far, the southern portion of the US has been pounded with rain which has wiped out any drought conditions from Eastern Colorado/New Mexico as well as Texas and Oklahoma which had been battling drought for years. But California was unable to capitalize on a tropical depression that grazed their shores earlier this month. New Zealand has not seen any dryness during their winter months as pastures are near normal and ready for the upcoming season. HighGround does not see anything on the horizon to have a significant impact on milking conditions in the world s major milksheds until first half of 2016 but we will keep a close eye on California. April milk production there improved to just 2.2% below prior year after being DOWN 3% in Q1 vs. prior year but May production rolled back to -2.9%. Cows are not performing in that state and is completely a production per cow issue. If this trend continues into the second half of the year, there is potential for production to decline 3-4% vs. prior year. 20% of the nation s milk is made in California and therefore will remain an upside concern to our forecast. Nearly every other region of the country is in great shape from a production standpoint. 7

8 Risks to the HighGround Forecast Upside Risks continued Other Climate Concerns: India: The start and timing of the monsoon season always brings concerns and there was some chatter that El Nino would have a negative impact on the rain. But in an article recently published, India is seeing the monsoon tracking 13% ahead of normal in June on a countrywide basis. China: There has been talk of El Nino potentially drying out the northern half of the country, but there has been no major threat to dairy regions there. Europe: Very small pockets of dry weather but otherwise if has remained a bit cool in much of the region. Conclusion: Weather remains a risk, and conditions have almost been too good in some regions of the world. But there is no imminent threat and odds of a major weather event occurring in 2015 are slim. That said, our eyes remain open. The Big Two (China & Russia): There is little news on the horizon to suggest a turnaround in buying patterns from the two largest dairy importing countries in the world, but if either China or Russia alter their current pattern, it could have a significant impact to the market just as it has in their absence. The summer is China s downtime from an export standpoint so HighGround does not expect much noise from that region. And after the article Wall Street Journal published last week (subscription required) along with an increased show of military force by both Russia and NATO in border areas, do not expect any changes to Russia s sanctions toward the West anytime soon. 8

9 Risks to the HighGround Forecast Downside Risks Domestic nonfat dry milk prices are at multi-year lows, but without a support price at $.80, no one really knows where that market can go, especially if today s cheese and butter prices keep milk flowing throughout much of the US. Burdensome Inventory Rears Its Ugly Head: HighGround has been surprised Natural American cheese inventories have been so light to build in H1 given the carry trade opportunities in the CME futures forward curve. Depending on who you ask though, those numbers are either correct or way too low. But on the flip side, current butter inventories make today s prices look too high! If strong cheese demand in the first half of the year was more building of inventory rather than incremental sales, and hard Italian production grinds to a halt, then the second half of the year could turn into a counter-seasonal decline, especially if cheddar production turns positive. NFDM and dry whey markets could be seeing this inventory dumping occurring right now as those markets are making fresh 2015 lows. Could be cheese and butter be next? International Market Fails to Turn Around or US Economy Stumbles: Based on the latest GlobalDairyTrade auction, HighGround feels less comfortable the bottom is in and a recovery is anywhere close to taking shape. There still seems to be too much milk in the world and not enough demand to help support the market at today s levels. Add the US Federal Reserve downgrading its 2015 economic outlook - but also re-affirming a potential interest rate hike this fall - which does not bode well for commodity price inflation in the near term. 9

10 US CME Block Cheese Forecast 10

11 US CME Butter Market Forecast 11

12 US Dry Whey Market Forecast 12

13 US WPC-34 Market Forecast 13

14 US Lactose Market Forecast 14

15 US NDM Market Forecast 15

16 US Class III Milk Forecast 16

17 US Class IV Milk Forecast 17

18 HighGround Dairy Market Intelligence Fundamental Analysis Package Breaking news updates impacting global dairy markets Daily CME Spot market & Daily News Wire s Weekly & bi-weekly international price reports Comprehensive Global Dairy Trade (GDT) auction analysis Import/Export volume analysis on key dairy regions Detailed monthly analysis on critical US reports including Milk Production, Cold Storage, Dairy Products, etc. US dairy commodity price forecasts Technical Analysis Package Simple, easy-to-read technical comments that analyze the behavior of dairy futures trading activity at the Chicago Mercantile Exchange Support and resistance levels along with short and long term trends identified using a variety of mathematical technical indicators Class III milk futures reports are published three times each week along with a second commodity at least once per week Monthly report analyzes the weekly futures charts of all CME dairy commodities analyzing medium to long term market trends

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20 HighGround Dairy Eric Meyer President 209 W. Jackson, Suite 701 Chicago, IL USA Phone: Mobile: Yahoo IM: ericmeyer22 Disclaimer HighGround Dairy is a division of HighGround Trading, LLC. ("HGT"). HGT is registered as an Introducing Broker with the Commodity Futures Trading Commission and an NFA Member. Futures and options trading involves risk of loss and is not suitable for all individuals. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports distributed by HGT shall be construed as a solicitation for entering into a derivatives transaction. HGT does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation Copying, reproduction, modification, distribution, display or transmission of any of the contents in this document for any purpose without the prior written consent of HighGround Dairy is strictly prohibited. While every reasonable effort is made to ensure that the information provided in this presentation is accurate, no guarantees for the accuracy of information are made.