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

Class III futures closed out Friday quietly with only 884 trades taking place, a decrease of nearly 700 contracts from Thursday. Price changes ranged from a gain of six cents in March12 to a loss of six for the May12 contract. Class III prices rebounded strongly on the week, though, highlighted by a 75-cent gain in the March to May pack, from Monday’s $14.54 to $15.29. 

The USDA’s World Agricultural Supply and Demand Estimates (WASDE) report points to a still-weak price outlook for the Class III.  The March WASDE price range is $16.35 to $16.95, falling from the February range of $16.70 to $17.40.  The 2011 Class III price was a markedly higher $18.37. The all-milk price range fared no better, dropping to $17.60 to $18.20 from $18.00 to $18.70. The drop in price estimates is a reflection of the increase in the milk production numbers. March’s total milk production estimates grew by 700 million pounds from February’s estimate, to 199.7 billion pounds. This is an increase of 3.5 billion pounds over the March 2011 production number. Lower prices could lead to herd reductions, but any impact on pricing, if actualized, wouldn’t be felt until the second half of 2012. The class III complex has found a temporary refuge from price decay, but we feel that will be short-lived, barring a significant weather event in the near term.

Spot pricing jumped Friday on single bids for each market and no trades.  Blocks increased .75 cents to $1.4925, as the barrels leapt three cents to breach the psychologically significant $1.50 mark, settling at $1.5025.  Important to note that the barrel price kind of limped passed $1.50 and didn’t explode beyond it. That likely left some market participants seeing weakness more than continued strength. The weekly NASS price for blocks was $1.4873, while the barrel price was $1.4822.  The increase in spot prices helped to support the Class III market in a quiet trading session, albeit with some help from the increases in dry whey prices. 

Grains ended the week with a flurry of reports. First up was the USDA report which came out neutral to slightly bearish across the board. The only real bullish thing to be found was the sharper than expected reduction in South American soybean production.

Following that report, we were looking for a steady opening and thought the lack of any bullish information would find some selling after the report. That, however, didn’t come to fruition as double-digit gains were seen some 30 minutes after the opening across all three products. Talk started to circulate that Chinese buying may have triggered the rally, but that was quickly proven false and, in fact, premiums on the export market were lower by mid-day. It seems fund buying was the main driver and the rumors were only an attempt to reason what was happening to the price. Just before mid-day, the Informa new crop estimates came out and brought prices off of their highs. Both corn and soybeans secured more acres on that report, and that’s the intention of the market right now to maintain an S&D balance heading into next year.

With some of the luster fading from the early morning rally grains managed to close higher but were off of their intra-day highs by the end of the day. May corn futures ended 9 ½ cents higher at $6.45 even, beans ended lower at $13.37, down ¾ cents and wheat finished up 8.25 cents at 643. In spite of closing higher on Friday for the week corn closed down 10 cents, while wheat lost 31.5. Soybeans, however, did continue their climb on the week, showing technical strength and ending up 4.75 cents despite the slight loss Friday.

We continue to believe that lower prices are on the horizon with yet another failed attempt by corn to break out above its recent highs. However, the March 31 acreage report is now in the markets sights and that report has provided extreme volatility over the past few years, so we wouldn’t expect this year to be any different. It is likely in the best interest of grain end-users to explore call options in the coming week for spring protection.

We look for the grain complex to open mixed

Daily CME spot market prices:

Block cheese $1.4925 (up 0.75 cent)

Barrel cheese $1.5025 (up 3 cents)

Butter:  $1.45 (unchanged)  

Grade A NFDM: $1.2675 (unchanged)

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