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

As the ADPI and USDEC meetings have finished up, the dairy complex sentiment is, in large part, bearish. The cold winds in dairy, however, are juxtaposed by U.S. factory activity, which grew in April at the strongest rate in 10 months as reported by The Institute for Supply Managements index, rising to 54.8 from 53.8 in March.The number beat forecasts and, more importantly, eased worries the U.S. economy had lost momentum at the start of the 2nd quarter. Stock markets closed at new highs for the year yesterday.

As for dairy, however, the boost to in barrels was not enough to sustain the short-covering rally that begun on Tuesday. After the spot butter market closed, futures started selling off and had no intention of stopping. The bears got their way and even pushed July into the $14.84 range. July lead the way down, losing 34 cents. But June and the rest of the 2012 complex didn’t want to be excluded from the party. They all sold off anywhere from 2 to 24 cents. There continues to be pressure on the second half of 2012, but not what we are seeing in the May through August contracts. 

Most expected the block portion of the spot market to fall in sympathy with the recent declines realized in the barrels, but traders had different plans. The barrel market actually rose 3 cents with no volume. The May to June average is $14.85 and the July to December average is $15.54. Cheese futures did the same, selling off and selling off hard on 158 contracts traded and the biggest loser being June, off .029 cents, settling at $1.497. The May to June cash cheese average is down to $1.514.

The release of the Dairy Products Report yesterday helped sponsor some post-pit close selling as we’re finally seeing a bigger shift of milk into the cheese vat. If you did not receive our commentary on this report, please let me know. Overnight, Class III traded as much as .17 lower. Cash cheese futures traded 22 times in similar price fashion. Butter also traded once at ¾ of a cent lower in August and that was all for the overnight dairy session.

We look for milk and cheese futures to open mostly lower.

To follow up on the BSE case, according to Bloomberg News. “A calf of the 10-year-old California dairy animal found to have mad cow disease tested negative for the illness after being euthanized,” the U.S. Department of Agriculture said. That animal, which was found in another state, and a stillborn calf born to the diseased cow, are the only progeny that have been identified, the USDA said in an e-mail. The statement didn’t say if there were other offspring.  Two dairies associated with the case are now quarantined, the department said.  A calf ranch where the infected cow had been raised 10 years ago  is also being investigated, the USDA said. No animals from the cow’s birth cohort have been found, it said.

Grains came off the board yesterday with the May and July futures ending 17 ½ cents lower.  New crop came in lower as well by 11 cents. Many are pointing to funds getting out of long positions in what looks like something of a correction in trading. The weather has been good and the planting seems to be progressing so that has helped push all the grains down. Smaller and smaller soybean crops from South America continue to drive the idea U.S. soybean production plays a greater role in world export supplies for the next crop year. Don’t rule out larger bean acres and even larger than normal double crop bean acres this year. 

We look for corn to open 1 to 2 cents higher and for beans to open 2 to 4 higher.

Daily CME spot market prices:

Block cheese: $1.535 (unchanged)

Barrel cheese $1.495 (up 3 cents)

Butter: $1.345 (down 1 cent)  

Grade A NFDM: $1.1475 (unchanged)

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