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

Class III futures proved resilient to price declines to start the week yesterday. Whey futures sagged early yesterday but stabilized and spot cheese was unchanged with good buy interest in the block cheese market.

We feel that unless there is a weather disruption, this is likely just a bounce in a larger bear market. Note we have previously discussed a potential bounce that could occur in mid-Q2. Given the extraordinarily strong milk production between New Zealand, Australia, Europe and the U.S., we don’t foresee that bull market materializing without an unforeseen weather event of extreme nature. Without a tumultuous weather event, we could see $14 milk in the 1st half of this year. Given the price of inputs, that means we could see strong dairy herd liquidation in Q2 or Q3, particularly if the beef price holds high. But for now, the path of least resistance for Class III appears to be to the upside. 

Cooperatives Working Together (CWT) announced assistance with 5.5 million pounds of butter and cheese export sales. They accepted 20 requests for export assistance from DFA, Darigold, Maryland & Virginia Milk Producers, MMPA and UDA to sell a total of 2.489 million lbs (1,129 MT) of cheddar, Gouda, and Monterrey Jack Cheese and 3.053 million lbs (1,385 MT) of butter to customers in Asia, Central America, the Middle East and N. Africa. Product is to be delivered between Feb 12 and June 12. We feel that the CWT’s work is felt more acutely in times of generally short product supply, as was the case at times during 2011. But it is worth noting that since the beginning of the year, CWT has been responsible for the export of more than 27 million pounds of cheese. It is too early to suggest that this will tighten up the current available supply of fresh cheese, but it is worth keeping in the back of our minds.

Corn prices were lead higher by leading soybean markets, which were propelled by strong exports and a generally tight S&D table. The fact that corn prices settled nearly 5 cents higher, despite a stronger U.S. dollar and very weak crude oil prices, is bullish in itself. Multiple private analysts are calling for record canola acreage to be planted in Canada this spring, yet prices remain firm and that is bullish indeed. Technically, the market has consolidated.

The year is still young and traders still have reason to be concerned about not only expected plantings, but also how they go. The USDA told us Friday that “Conservation Reserve Program (CRP) enrollments are also down again for 2012-13 with total CRP area 6.8 million acres lower than at its peak in 2007-08. This past year’s 1.2-million-acre decline in enrollments adds further to available crop land.”  It doesn’t appears will have a problem finding the land, just whether or not it gets planted in a timely fashion. By the looks of the mild winter, it ought to go off without a hitch.

We look for corn to open 1 to 2 cents higher and beans to open 5 to 6 higher.

Daily CME spot market prices:

Block cheese $1.4675 (unchanged)

Barrel cheese $1.47 (unchanged)

Butter:  $1.395 (down 2.25 cents)  

Grade A NFDM: $1.2925 (unchanged)

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