By Joe Schmit
THE SPOT MARKET
On latest GDT auction, all prices improved by an average of 3.5% with cheese trading at a $1.78/lb equivalent while SMP rose to a $1.20/lb equivalent. At the CME, the cheese market reached its seasonal peak during the second week of November and has drifted lower ever since. Anecdotal reports suggest that Barrels are in ample supply while Blocks are a little harder to procure. Spot NDM worked higher through the month of November closing above the 100 day moving average for the first time all year. The price of Spot CME cheese and NDM are both well below their NZ equivalents.
Exports were robust during October. The latest import/export report showed significantly more product leaving our shores then in the prior year. Cheese exports rose by 5%, while NDM shipments climbed a whopping 14%. October was the first month this year with higher cheese exports than the prior year.
THE FUTURES MARKET
We entered the month with futures holding a substantial discount to spot equivalents. This market structure normally rights itself with spot prices moving significantly lower while futures break a little. This month, however, was a little different. Tightness in the Block and export demand for processed solids prevented the spot cheese markets from breaking as much as expected. The futures responded by rallying to new highs despite lower cash. The complex started with a huge gap between spot and futures and righted itself by meeting in the middle. Futures and cash begin this month at parity and futures should move with spot going forward. In addition, the futures curve is essentially flat with only 90 cents difference between the highest priced contract and the lowest. When spot does move, futures will too.
The dairy complex has been volatile in 2016. Big moves one way, only to pivot and move back to where it started. The market action has been very choppy and difficult to predict. Now the futures complex is telling us that we can expect fairly steady prices in 2017 as Class III futures are trading within 50 cents of the 1700 strike price for the entire calendar strip. It is possible that a range bound year awaits, however, there are a few factors that indicate otherwise. First, Global milk supply will be lower next year due to the financial hardships faced by dairy farmers during the first half of this year. Also, NZ prices have bottomed and are moving higher. The US is now trading discount to NZ. Most importantly, global demand for fat is outpacing supply. Whether it’s butter, AMF, bean oil, or palm oil, prices have all moved higher during the fourth quarter. This is ultimately supportive to cheese. And finally, we await the Chinese wild card. China imported 4,400 metric tons of cheese during October. It remains to be seen if this is the new normal or just a one time anomaly. If China enters into the mix after essentially a two year absence, the Class III market could heat up during the imminent frigid Chicago winter.