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Has the Dairy's Bull Train Run out of Steam?

Apr 24, 2014

What’s behind the slowdown in the market’s upside momentum.

By Brendan Curran, International FC Stone

Curran FCStone

Upside momentum has stalled in the global dairy market. Supply from Europe and lower-priced competitors have begun to satiate the global demand that played a key role in driving prices higher. U.S. dairy prices have begun to adjust to find a level where the market again feels healthy.

However, the bullish fundamentals underpinning the global market have strong roots. The most widely discussed factor is the unprecedented surge in international demand that the U.S. dairy industry has opportunistically stepped up to meet.

A factor discussed less, but one that may become increasingly important, is U.S. dairy farming itself. The current market still reflects how growth of new farm investment and milk production in the U.S. has been stunted over the past few years. Only now is the domestic growth factor starting to show meager signs of coming to life.

So where does that leave us? To gain perspective, let’s focus on the fundamentals.

INTL FC Stone chart 4 25 14


It was milk powder demand that sparked this rally in the first place, driving up NFDM (non-fat dry milk) and Class IV milk prices over prices for Class III and cheese, which eventually became reluctant followers. Surplus diverted into Class IV for powder production was what eventually put the squeeze on cheese.

However, five consecutive soft GDT (Global Dairy Trade) auction results have made international prices far more competitive than that of the U.S. The Chinese have been noticeably absent from the last two GDT auctions, contributing to weak results that saw. Has the bull train run out of steam?

NFDM spot prices at the CME (Chicago Mercantile Exchange) is trading in the mid-$1.80’s amid continuing soft CWAP (California Weighted Average Price) prices. Pent-up demand by those entities who were previously priced out of the market has yet to fill the void. These buyers are likely taking a conservative approach to avoid "catching a falling knife."

With increasing domestic milk production and a softer tone to the powder market, surplus milk will likely be redirected back into cheese production. Strong European production has pressured prices overseas and at some point that will have an impact here in the U.S. For the time being, however, we’re still dealing with tight inventory levels of cheese and butter that can prolong higher prices. But weakness in NFDM is expect to further weigh on other dairy product spot prices in the coming weeks.

Brendan Curran is a Risk Management Consultant with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach him at 312-456-3613.

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