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The World Market

As the latest GDT auction plummeted an additional 7.4% the world powder markets have taken their cue. Prices at the CME have dropped more than 25% representing a $.30/lb. decrease from levels achieved just a few weeks ago. European prices have inched back toward intervention levels as product struggles to find a home. The CME is once again the cheapest product in the world trading at $.81/lb. with international equivalents trading around $.90/lb. Anecdotal reports suggest that prices could remain at or below current levels well into next year with cash contracts trading at current levels through June of 2016.

In stark contrast, the futures market tells a different story. The futures market has built a premium structure with each contract trading at a higher level than the previous month. The futures complex has seen robust volume in recent sessions with moderate gains in open interest. While the sellers’ motivation is clear as futures are carrying a premium to a spot market that’s been under constant pressure, the buyers motivation has been less clear.

Futures buyers have been abundantly present regardless of futures premiums and reports of spot sales below CME. A few possibilities may explain such behavior. The El Nino fueled New Zealand drought has begun. Reports of below normal sub-soil moisture content are already making headlines. The drought’s potential impact on world powder prices will be exemplified if New Zealand has spent the first six weeks of its’ season making cheese as it did before the previous drought event in Spring 2013.

Traders may be using the recent pullback as an opportunity to obtain additional coverage as the drought scenario continues to become more of a reality. Also, the buyers that didn’t have enough product during the last rally may be strategically positioning themselves prior to the next rally. Lastly, traders understand that a large amount of the NDPSR reported NFDM sales are based on the prior months averages.

This would explain the premium structure of the November contract, as confirmed by the most recent NDPSR report which showed a slight increase in price while AOM prices for the corresponding week actually decreased.

The Cheese Market

The cheese market is having trouble maintaining recent gains as holiday buying winds down. Without holiday orders underpinning the market, spot cheese at the CME broke seven cents lower with little resistance. Futures have been in a downward trend since late October. While the market headed lower, open interest gained substantially on lower days and remained largely unchanged on higher days indicating a spot price change was imminent.

As prices move lower, the featured spot cheese sellers appear to be a cheese marketing company and their primary supplier. The marketing company is being more aggressive than normal which may be attributed to several factors. First, U.S. cheese prices are significantly higher than New Zealand equivalents. Oceana encountered a similar market dynamic in the fall of 2012 and opted to make cheese rather than SMP/WMP for the first six weeks of the new season.

That extra cheese ultimately found its way to our shores and into the coolers of the marketing company mentioned above, displacing domestically produced product.

Floor traders refer to the “cheese boat” which arrived during November 2012 when displaced domestic cheese moved CME prices from $2.00/lb. to $1.56/lb. over the course of a few weeks. Another possible reason for the aggressive selling is that the marketing company accepted cheese contracts rejected by a competitor with the additional cheese received to be priced on a CME plus basis over the course of the next few weeks. Regardless, it would appear that spot barrel cheese is readily available with a motivated seller making it difficult for prices to remain in the $1.60/lb. neighborhood.

Looking Forward

NFDM appears to have run out of sellers below $.85/lb. While prices don’t need to go immediately higher, downside appears limited at these levels as $.81/lb. NFDM is the cheapest product in the world. Physical traders have minimal risk taking on additional product with the current premium futures structure ahead of a potential drought. Cheese, on the other hand, continues to trend lower. Barrels were able to post a $1.60/lb. weekly average during the peak holiday demand season. Look for Barrel cheese prices to continue to trend lower into the $1.40’s/lb. prior to the year end.

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