Cold storage report bullish for butter and cheese

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Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.

In our opinion, yesterday’s USDA Cold Storage report was slightly bullish for butter and bullish for American cheese. Butter inventories remain well below normal and though they built month-over-month, they lost ground vs. year-ago levels from January. Stocks increased month-over-month much less than we expected — up just 16.7 percent vs. our estimate for an increase of 36.9 percent.

For cheese, while the other cheese category continues to grow, up 2.6 percent from a year ago, both American and total cheese stocks declined compared to last month. For American cheese the decline was 2.5 percent and in the previous 10 out of 10 years, stocks of American cheese have increased in February. Total cheese declined 1.6 percent, which is just the second time in the last 11 years that total cheese stocks declined month-over-month in February. Our estimates were also higher for month-over-month inventories for American, up 1.9 percent and up 0.7 percent for total cheese stocks.

Cold storage inventories for butter on Feb. 28 were 138.7 million pounds, down 31.7 percent from the same month a year ago. In addition, butter inventories grew 16.7 percent from the previous month. Prices continue to be seasonally very high, and though we continue to build stocks, we are not rebuilding those stocks at an equal pace with the increases seen in 2010, even though milk production continues to be strong while fluid consumption is lower.

Class III traded mostly mixed throughout what was by and large, another moderate volume, consolidation trade Tuesday. Selling pressure was reserved for the second quarter for the bulk of the trading session, while the path of least resistance was to the upside on the second half. Commercial buyers are seeing favorable budget numbers in Q2 and have provided some underpinning support, while July-December commercial buyers appear more inspired by thought of increasing demand later in the year. Short-term technical strength combined with light producer offers promoted strength late in the day after what was considered a mostly bullish Cold Storage report relative to expectations.

The Cold Storage report on cheese reinforces the concept we discussed yesterday on our interpretation of the commitment of traders report and the very recent strong buying that has been present during the Chicago Mercantile Exchange spot cheese session. The significant commercial upside hedging that was represented in the CME spot sessions has slowed the price decline but has not been strong enough to force the sellers to step aside. We would suggest that current spot prices are also attractive to buyers as they have slowed the price decline and acquired a good amount of product over the past few sessions.

Both those factors, combined with a month-over-month decrease in stocks appear to us to be bullish and suggest that spot cheese, cheese futures and Class III futures may be rounding out a bottom. Volume for Class III futures yesterday was 1,483 contracts and Class III futures prices were weaker in the front months, -10 to -25 from April through June, and stronger — from steady to +15 from July on out. That tells us that the market is expecting higher cheese prices but is overall uncertain as to when. The historical seasonal pattern seems to be being leaned on as the strength was consolidated in the warmer summer months when production typically declines. The next few sessions will likely tell us if all of this bullish news can translate into a bottom for prices.

We expect Class III to post moderate gains through April overnight and up to the spot session, and the differed months to possibly trade mixed initially, with potential for double-digit gains post-spot if cheese buyers present themselves once again as we expect.

One hundred ninety-four trades took place in the nonfat market yesterday. A renewed buying interest has entered the market which pushed trades higher. Possible increased skim export expectations may be the underlying bull force behind the move. CWAP prices announced yesterday continued to climb as they play catch-up to where futures and spot markets have been to 1.4694, up 4.9 percent from last week with a total of 13.65 million pounds consistent with volumes over the past few months. Weekly NFDM stocks were up a surprising 38.7 percent from last week at 18.9 million pounds.

Grain markets traded mostly lower during a more quiet session Tuesday. The escalation of what appears more of a “police action” in Libya is providing some headwind to further advances, along with a set of larger acre expectations out of Goldman Sachs. The investment giant called for the 2011 U.S. corn acreage to come in at 92.1 million acres, slightly above the recent USDA and Informa figures. Goldman’s soybean estimate came in at 75.6 million acres, above Informa’s 75.3 million acres but still well below the 78 million USDA Ag Forum number. Also weighing on prices was a statement by Sinograin, China’s state grain reserves corporation, which denied rumors that it has bought any U.S. corn last week.

Spot Markets:

     Type of Load          Trades           Settlement        Change               Bids               Offers

Cheese

Blocks

2

1.6500

UNCH

1

1

Barrels

1

1.7000

UNCH

0

0

 

NFDM

Grade A

0

1.7600

DOWN 1

0

1

Extra Grade

0

1.8000

UNCH

0

0

 

Butter

Grade AA

6

2.0600

UNCH

0

1

 

Historical

Type

Year Ago

Month Ago

Week Ago

2 Days Ago

1 Day Ago

Blocks

1.2700

1.9825

1.8200

1.6850

1.6500

Barrels

1.2650

1.9450

1.8500

1.7000

1.7000

Butter

1.4750

2.0050

2.1200

2.0700

2.0600

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.

Source:  FCStone/Downes-O'Neill


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