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

Volume was so low yesterday that you would have thought it was still a holiday. There was plenty of data to digest throughout the day, it should have encouraged trading; maybe traders were waiting to see the dairy products report?

The largely weaker GDT results did little to squelch the Class III price rally which initially was supported by a swift bounce in corn prices so far this week. In the later parts of the morning, milk futures were supported by emotion. Some market participants were encouraged on the bullish side by a load of block cheese trading — and another barrel bid — citing market support rather than the fact blocks have fallen for two days in a row. Still, volume on which milk futures rallied (less than 900 trades) left much to be desired and frankly weakens today’s rally. We look for opposing price action soon, although it might just be a bit too early to fade this rally.

The Dairy Products report was a mixed report, with big percentage swings in inventory levels, though in our opinion mostly bearish for the major products cheese, butter and NFDM.

Dairy Production Highlights, May 2011:

American cheese production, 371.16 million pounds, down -0.10%
Mozzarella cheese production, 308.95 million pounds, up 5.10%
Butter production, 155.95 million pounds, up 18.30%
Nonfat dry milk production, 147.67 million pounds, down -4.60%
Skim milk powders production, 35.67 million pounds, up 108.00%
Milk protein concentrate production, 9.32 million pounds, down -26.90%
Dry whey total production, 91.53 million pounds, down -6.10%
WPC total production, 36.61 million pounds, down -0.50%
Lactose production, 86.00 million pounds, up 13.40%

Inventory Highlights, May 2011:

Nonfat dry milk inventory, 166.17 million pounds, up 10.90%
Dry buttermilk inventory, 17.69 million pounds, up 4.80%
Dry whole milk inventory, 7.70 million pounds, down -13.50%

Dry whey inventory, 50.68 million pounds, down -10.10%
Lactose inventory, 73.50 million pounds, down -3.20%
WPC total inventory, 31.77 million pounds, down -1.90%

Our more detailed breakdown of this report is as follows:

  • Butter—neutral. Butter production in May was 155.9 million pounds, up 18.3% from a year ago but down 5.0% from April 2011(on a daily average basis). This estimate was right in line with our expectations, so we don’t foresee much impact as a result. 
  • Cheese—bearish. May American cheese production was 371.2 million pounds, down 0.1% from a year ago; Mozzarella cheese production in May was 308.9 million pounds, up 5.1% from a year ago a continued trend of stronger production vs. year ago levels. Both American and other cheese production levels came in above our estimates for May and total cheese production was up 3.9% from a year ago.
  • Nonfat dry milk— bearish.  Nonfat production in May was 147.7 million pounds, down 4.6% from a year ago and well below our expectations. However, production of skim milk powders was 35.7 million pounds, up 108.0%. Manufacturer’s stocks at the end of May were sharply higher despite production being lower than our estimate. At the end of May 166.1 million pounds were in storage an 11.7% increase over year ago levels and up 10.9% from April. When stocks see that sizable of a jump, we see little choice but to interrupt it as bearish.
  • Dry whey—bullish. Total whey production came in at 91.5 million pounds as more product went into WPC and Lactose during the month of May. Production was up 2.6% from year-ago levels, but down 3.8% from April on a daily average basis. Manufacturer’s stocks declined during the month as well falling to 50.7 million pounds down 6.1% from year ago levels and down 10.1% from last month. Though stocks were down sharply, most of the decline was from the lower-quality animal product, which may be an indication of higher feeding with grain prices having been very high. Human product stocks were also down 9.3% from April, as well, so in the opposite move of NFDM we have little choice but to call this bullish with the large stocks decrease. 

In the grain markets, the wicked swings continued as grains mostly held or added onto their overnight gains during Tuesday’s session. It looked like the strength may fade early, but by the end of the day strong cash markets and a lack of deliveries had pulled July corn up 39.75 cents and new crop tagged along for 15.75 cent gains trading to 612.50. Beans picked up 5.5 cents in November and wheat prices were sharply higher, led by Minneapolis up 28.5 cents, while KC gained 14.75 and Chicago was up 20.75.

This morning, we look for corn to open 4 to 6 cents lower and for beans to open 8 to 11 lower.

Daily CME spot market prices:

Block cheese: $2.1225 (down 0.25 cent)

Barrel cheese: $2.1025 (up 0.5 cent)

Butter: $2.04 (unchanged)  

Grade A NFDM: $1.625 (unchanged)     

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