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

In 2011, Class III was the best performing commodity; meaning year over year it increased in value more than any other product.  

There are many reasons for this. Everyone will point first at the record exports, and those are a dominating factor. But there were additional causes — domestic demand was strong as well.  Quick service restaurants saw an increase in cheese usage as they competed for market share and Wendy’s took the No. 2 spot from Burger King. Pizza stores had great competition, as well, as they competed for market share and used additional cheese offerings.  Dry whey exports were down, but prices soared — attributable to domestic demand and, of course, the whey price adds substantial value to Class III pricing.  Butter inventories plunged in 2011 and fat demand was high. While many were concerned about substitutions away from butter or dairy products in general, we never saw that materialize on any significant level.

A year ago at this time, prices began to mount an assault upward on the hill. It was a surprise move to most in the industry and was spurred both by exports and by cheese recalls. As a result of the strength in Class III for 2011, dairy farms in large part were profitable — some very much so, as high milk prices offset high feed prices, even record hay costs.

Now at the start of 2012, we have already seen dairy prices recede from the earlier highs. Buyers have taken opportunity to start getting product bought and prices locked up as current and forward pricing is well below most budget numbers for most dairy products. Farmers are in the same spot today as they were a year ago, except most have a bit less debt than a year earlier. They are mostly profitable at the moment, but are seeing losses in months to come based on futures prices, and they are worried rightfully so.

Global dairy production has been strong and, setting aside unpredictable weather, we don’t see a decline anytime soon. Feed prices which eased some have come back to weather strength lately. Now we will have to see what price it takes to attract enough buying to set a floor. For now, we are bears.

In the grains, 2011 ended on price strength attributed to weather issues in South America. Five consecutive weeks of price increases in corn and a string of consecutive up-sessions have us looking for a break to buy, but we need a break for there are two emotions that dominate trading, fear and greed. Right now, our fear is it is too late to buy first or even to buy more. We don’t want to fall off the top of the stairs and we suspect any slight change in weather would cause a price avalanche with the last buyers in getting trampled.

Daily CME spot market prices:

Block cheese: $1.5625 (unchanged)

Barrel cheese $1.58 (unchanged)

Butter: $1.595 (unchanged)  

Grade A NFDM: $1.45 (unchanged)

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.