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.