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.