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

Sometimes we all get it wrong ― and we do call ourselves out when we do. So, don’t hold it against me for calling out that we got this current bull move in dairy correct from the essential onset. Back in late January, we wrote bearishly about the very short term and the markets were bearish to front month contracts. In February, we started to turn bullish medium term; in some instances, we sold front months while buying back months and in others we simply bought. Now, the markets have been making their horned move (bull move) and it is well under way.

Yesterday’s and overnight’s dairy trade action was BULLISH on all fronts. Volume was high in all products, OI increased and prices moved up. Overnight, we’ve traded nearly 250 Class II contracts as much as 25 higher and 22 cheese futures up 1 cent/lb. Everything visible confirms the bullish move and signals expectations for further price increases as recent technical updates we’ve sent have also shown.

On the fundamental front, I’ll keep it somewhat brief. Milk production was somewhat bullish and GDT was robustly bullish (once again) as WMP reached a two-year high. The sentiments presented in yesterday’s morning report (if you have not read it, in this instance please do) were echoed strongly in yesterday’s market action and we reiterate them only with more strength this morning.

Spot butter continues to show follow through strength, NFDM prices are moving up on good volume and all reports suggest West Coast inventories have been swept nearly clean the last few weeks. Cheese inventories are there but fresh cheese while still not tight is getting there and all this in the face of a strong U.S. dollar, much like corn, which is all the more short/medium term supportive of expected follow through. We feel strongly that end-users should be aggressively buying any price breaks and getting long futures aggressively through June/July. If there is a strong desire to leave downside potential open, then call spreads are the way for dairy buyers/users to go; discard that insurance around 21.00-22.00 Class III price.

In our opinion yesterday’s Milk Production Report is bullish. The milk production figures came in below expectations.  23-State milk production (once adjusted for the leap-year) arrived up only 0.1% while the total U.S. figure showed unchanged growth from last year. Our expectations had been for a 0.4% and 0.3% increase, respectfully, and the market had generally accepted pre-report expectations of milk production growth in the 0.3% to 1.0% range.  

Although the report was lighter than trader consensus, the drumbeat is the same: contraction in the Western U.S. and growth in the Midwest.  California, Washington, Idaho, Arizona, New Mexico and Texas all posted declines in production while the upper Midwest through the Foundry and up into New York all continued to post year-over-year gains. The difference ― and the main reason we think this report fell short of trader sentiment ― is that milk-per-cow is showing signs of weakening here in the Midwest. A mix of colder weather and poorer-quality feed this year is dealing a one-two punch to Midwest producers in February and we’re slowing seeing growth increasing at a decreasing rate. 

Market bears will look at the fact that unchanged from last year – which was up 4.5% - is no small volume of total milk production especially when cow numbers rose by 2,000 head from last month. They have a point. Market bulls will contend that this type of ho-hum production is a little worrisome at the beginning of the “flush.” And 2,000 head is not enough to offset the weakening picture of milk-per-cow due in large part to feed.

From a domestic standpoint, total production is not specifically bullish. But when we look at it through the global lens, these production numbers are bullish. We’ve grown dramatically as a supplier to the world, but if we’re seen as a “balancing-plant” for a weakening global dairy production picture it is our assertion that this report doesn’t cut it. 

The dairy markets have rallied across the board for the past few trading sessions, so it is difficult to tell just how much of this report is priced into the market.  We’d suggest the bulk of it is at this time.  nd as we close the book on USDA supplied Milk Production Reports until October ― or more likely November ― we must say that unchanged growth is not the direction we’d expect to be going into the flush. If we have any sort of inertia right now, it’s a shrinking U.S. supply.

Spot session results:

Block cheese: $1.62 (up 0.75 cent)

Barrel cheese $1.60 (up 1.25 cent)

Grade A NFDM: $1.50 (unchanged)

Butter: $1.70 (up 4 cents)

The news regarding Valero Energy Corp. having all 10 of its ethanol plants up and running near or at full capacity (1.2 billion gallons) within two weeks helped spur the Monday turnaround and continued to buoy corn futures prices yesterday, as well. The May/Dec corn spread picked up 8 ¼ cents yesterday to close at $1.66 ¼, nearing the contract high of $1.69 ¾ back in August of last year. Beans tried to rally and did for a short while, but ultimately they fizzled alone as wheat, too, saw large price gains. Corn fund longs now approaching 200k contracts just as the price nears serious technical resistance ― can it muster enough fuel in the tank to keep going…? The rally of late has been in the face of a very strong U.S. dollar, up over 3.5 percent this year, as old crop tightness and on farm storage force basis higher. The song might be old, but it remains as true today as the first day it was being sung. Overnight, the grains all firmed up; beans are trying to bounce, the U.S. dollar is giving some reprieve in softness. 

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