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

Yesterday’s sharp (record) drop in weekly whey prices only serves as another log on the bearish fire in a market that is flooded with milk. Will we see the block and barrel markets decline sharply in short order?  Will Class III futures break levels of technical support? While we have a great deal of milk, cheese seems to be more in balance today than overwhelmingly heavy. But futures continue to trade at a premium to spot price, so further declines for Class III appear to be in the cards. Moreover, traders continue to add on down days, and down days tend to be higher volume on Class III and on cash-settled cheese. Even on up days, put purchases overwhelm call buying as traders protect and prepare for a wrecking ball. We look for Class III to trade lower early. And, while it appears poised for more weakness, look for a mixture of technical support and commercial buyers to provide some support.

Dairy Products Report Analysis:

The Dairy Products report released yesterday contains estimates of February 2012 dairy product production, as well as manufacturer’s end-of-month stocks for dry proteins and lactose.

Our interpretation of this report is as follows:

  •  Butter— slightly bearish. Butter production in February was 170.1 million pounds mostly in line with expectations following a large increase in stocks on the cold storage report. The growth in production represents an increase of 10 percent over last year on a daily average basis and a 0.7 percent increase over January as more milk continues to flow into the storable Class IV products. 
  • Cheese—neutral. February American cheese production was 347.5 million pounds, up 2 percent on a daily average basis over last year. Mozzarella cheese production in January was 287.8 million pounds, down 0.8 percent month over month. Total cheese production was 857.8 million pounds, up 2.6 percent from a year ago and also up 0.7 percent month over month. The production numbers were slightly lower than our estimates, but ultimately shouldn’t have a major impact on futures prices.  
  • Nonfat dry milk— very bearish. Nonfat production in February was 170.7 million pounds, up very sharply from a year ago by 49.4 percent on a daily average basis and up 10.8 percent from last month despite being two days shorter. Production of skim milk powder saw a significant drop to 18.2 million pounds, down 54.1 percent from January as export demand for powders appears soft based on this production shift. Inventories of NFDM spiked, as well, climbing by 23.7 percent over January to 196.3 million. Anyway you shake it, this is bearish and should see futures continue to trend lower. 
  • Dry whey— bearish. Dry whey production continues to see an increase month over month with human whey production at 85.0 million pounds, up 0.8 percent from January on a daily average basis, while animal grade production was at 4.3 million pounds, up 76 percent from last year. This left total production up just slightly below January on a daily average basis. Stocks were mixed as human grade dropped by 4 percent from last month to 38.9 million pounds, while animal grade increased 13.5 percent to 1.8 million pounds. The new “National Dairy Products Sales Report” showed a significant drop in weekly whey pricing in its first Wednesday announcement, falling to 55.5 cents ― a decline of 5.7 cents from last week weighing heavily on futures as it was released alongside the dairy products report and stole any potential headlines. 
  • WPC—neutral.  Total WPC production was down 0.9 percent from January at 35.7 million pounds. Production continues to shift mostly out of high value product as human WPC was down 3.4 percent from January, shifting slightly into whey production and animal grade WPC. Animal grade WPC production was up 39.2 percent month over month on a daily average basis. Stocks of WPC were slightly lower this month with human grade stocks at 38.9 million pounds, up 22.8 percent from last year, but down slightly by 4 percent from last month. Animal grade stocks were up 26.7 percent from last year and up 13.5 percent from last month at 1.8 million pounds. The drop in total inventory was far sharper than a typical Jan-Feb movement and, thus, despite the continued strong production, we’d term this report neutral to slightly bearish.
  • Lactose—slightly bearish. Lactose production continues to be strong at 80.5 million pounds, down 0.7 percent vs. January on a daily average basis but continues to be stronger year over year. Despite the slight decline in production stocks were able to build this month, increasing by 6.9 percent over last month, though they still remain 8.6 percent behind last year.

Dairy Production Highlights, February 2012(%Change Year Over Year):

American cheese production, 347.52 million pounds, up 2.03%
Mozzarella cheese production, 287.79 million pounds, up 1.59%

Butter production, 170.14 million pounds, up 10.01%
Nonfat dry milk production, 170.74 million pounds, up 49.35%
Skim milk powders production, 18.23 million pounds, down -51.47%
Milk protein concentrate production, 8.88 million pounds, up 19.20%
Dry whey total production, 89.27 million pounds, up 5.42%
WPC total production, 35.70 million pounds, up 8.05%
Lactose production, 80.55 million pounds, up 4.01%

Inventory Highlights, February 2012(%Change Month Over Month):

Nonfat dry milk inventory, 196.28 million pounds, up 23.70%
Dry buttermilk inventory, 19.68 million pounds, up 7.00%
Dry whole milk inventory, 7.45 million pounds, up 0.40%

Dry whey inventory, 51.41 million pounds, down -1.30%
Lactose inventory, 68.76 million pounds, up 6.90%
WPC total inventory, 40.71 million pounds, down -3.30%


The energy markets have been in somewhat of a free fall. The equity markets have fallen. The U.S. dollar has rallied. Based on this, you must suspect that our next sentence would read something like: grain prices fall hard. They haven’t. Wheat has fallen on planting and quality strengths, and that has anchored corn and beans along with the outside markets. But corn and beans have both been resistant to significant declines and that in itself is bullish.The old crop/new crop spreads have been all over the board of late with no rhyme or reason to them, but those should settle down here soon. Flat price, however, seems poised for further increases as bearish news isn’t initiating a decline, so we must wonder what will?

We look for corn to open 1 to 2 cents lower and for beans to open 4 to 5 higher.

Daily CME spot market prices:

Block cheese $1.49 (unchanged)

Barrel cheese $1.4625 (unchanged)

Butter:  $1.4375 (down 1.75 cents)  

Grade A NFDM: $1.2675 (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.