Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III prices continued their trend of softening early this morning as March and April traded to near 20-cent declines even prior to the spot session opening. With the weaker outside dairy markets due to a soft GDT auction, Class III seemed to be preparing for a steady to lower spot session. When spot traded down 1.75 cents on the block with aggressive offers throughout, and the barrels also declined, it seemed as though futures were ready for a sharp sell-off. During and shortly after spot, however, things stalled a bit and held mostly 10 to 20 lower until just before the noon hour and another bout of large selling pushed futures down sharply. While things attempted to stabilize, the market closed very near or right at its lows of the day. February through July saw 16- to 32-cent declines and August through March of 2013 were also down moderately by 1 to 7 cents.
Not only does the cheese market remain under pressure, despite a refilling of pipelines following Super Bowl demand, but dry whey futures are coming off sharply as well and weighing heavily upon the Class III market. With the DMN and bi-weekly international prices coming tomorrow, perhaps the whey market decline will be slowed or it may be accelerated. In either case, market- wide pressure is being applied to the dairy products across the board. And while we thought there may be a short-term uptick in the spot market, that chance seems to be fading quickly. Unless 2nd quarter purchases pick up rapidly and we begin to export some product, look out below.
December Dairy Products Brief:
***There was a typo on the report sent yesterday afternoon NFDM production was up 8% not 17% year over year
- Butter—slightly bullish. Butter production in December was 165.9 million pounds, up 5.2% from a year ago and up 5.1% from a month ago (on a daily average basis). Our estimate for production of 174.7 million pounds was well above the actual production for December, however, but that was in line with the typical seasonal increased production seen during December
- Cheese—slightly bearish. December American cheese production was 370.7 million pounds, up 2.2% from a year ago; Mozzarella cheese production in December was 321.0 million pounds, up 4.0% from a year ago. Total cheese production was 929.45 million pounds, up 0.86% from a year ago and up 1.0% month over month. While the American cheese production failed to meet expectations, both the other cheese and total cheese categories came in above expectations. This will likely do little to stem the recent down-trend.
- Nonfat dry milk— bearish. Nonfat production in December was 150.2 million pounds, up very sharply from a year ago by 8.0%. Production of skim milk powder was 36.6 million pounds, up 34.6% year over year. The month-over-month trend shows a vast increase in NFDM production and indicates that export demand is likely slowing for SMP. Manufacturer’s stocks at the end of December came in sharply higher month over month and year over year at 165.4 million pounds a 14.4% increase from 2010 and 13.6% higher than November. Look for continued weakness on NFDM futures following this report.
- Dry whey—slightly bearish. Dry whey production continues to show a decline against year ago levels but showed a large increase month over month. Total production was 83.0 million pounds an increase of 7.1% over November but lagging 2010 by 7.1% It was really the turnaround in stocks, however, that caught our attention as there was an 11.6% increase month over month to 45.6 million pounds. This should bolster the case for the seemingly toppy whey futures market.
- WPC—bearish. WPC production was up 5.8% vs. last year and up 7.6% vs. November at 39.6 million pounds this month. Production shifted sharply into high value product as human WPC was up 8.8% from Nov while animal WPC was down 9.3%. Stocks of WPC were also higher in total as they grew by 2.9% from last month led by a 3.9% increase in human WPC while the lower production of animal WPC led to a decline of 16.4% from last month. Total WPC inventory remains well above each of the past 4 years.
- Lactose—slightly bearish. Lactose production continues to be strong at 85.7 million pounds up 3.7% vs. 2010 and 5.2% vs. November. The reason we would call this slightly bearish is due to the atypical increase in stocks which grew by 4.1% vs. last month to 66.5 million pounds.
The grain trade continues to leave us perplexed as the intraday volatility reigned yet again. The late-day buying that came in wasn’t as aggressive as it had been on Tuesday, and corn closed up 3 cents at 642, beans up 16.25 at 1215.25 and wheat up 8.25 at 674.25. The market looked especially weak given that the dollar spent much of the day down over 500 points.
The trade does remain range bound, however, between $6.00 and the January highs in the mid- $6.60’s. The market continues to tussle with slow demand for ethanol as margins dip into the red and large wheat feeding substitution while looking at the global weather concerns as a potential boon for U.S. exports. The South American weather situation continues to be stable now with large rains in the nearby forecast, but beans continuing higher as private estimates continue to lower total Brazilian and Argentina production.
We will closely monitor the export sales report this morning as it seems to be the lone area where demand can rebound, but we have our doubts about just how badly affected the reports of damage are around the globe. Look for prices to be choppy near the upper end of the recent range, though we continue to feel prices should be nearer the lower end of that trading range.
We look for corn to open 7 to 9 cents lower and for beans to open 7 to 9 lower.
Daily CME spot market prices:
Block cheese: $1.4925 (down 1.75 cents)
Barrel cheese $1.49 (down 0.5 cent)
Butter: $1.495 (down 1 cent)
Grade A NFDM: $1.37 (down 1 cent)
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