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

Class III futures volume reached over 1,200 contracts, though watching the market it certainly didn’t feel like a heavy volume day. Prices rallied early, but lost steam after a steady spot market. Although spot buyers appeared to have carte blanche to push spot prices higher because no offers showed, they chose not to and that helped to take some of the steam out of futures buyers. Open interest in January fell once again and, outside of the seemingly perma-firm dry whey market, the Class III market appeared to falter some going into the Milk Production report. 

The USDA November Milk Production Report, released yesterday afternoon, looks largely neutral for prices, though there were some elements of bullish flavor to the report. Total milk production was slightly weaker than anticipated due to the first decline in cow numbers since September 2010. Milk production in the top 23 dairy states was up 2.2% vs. November 2010, which was just below our estimate for a 2.3% increase. Milk cows in the 23 states came in at 8.481 million — well below our estimate for 8.488 million and unchanged from last month. 

The irony of the report — if there is any — is that generally milk production continues to be stronger in the Western states where not only dairy farm profitability, but the fundamental dairy farm model of two to three thousand cows on 80 acres, has been questioned for some time due, in part, to increased feed costs. The production in the Midwest, however, was paltry at best in many states. Minnesota production fell by 0.1 percent; Ohio down 0.2 percent; New York fell by 1.3 percent, while Wisconsin eked out a gain of 1.6 percent. Overall, we don’t look for much in the way of movement because of November’s report.   

Grains found price strength yesterday on continued hot South American weather. Interestingly, corn the strongest of the three crops closing up 18 cents back above the 6.00 mark at 601. Beans, which had been leading the rally, closed up 7 and wheat was up 16 cents to 599.75. Rains are forecast for late in the week, and while we recognize the potential crop losses that could be seen as a result of this, weather demand must still be in question and with prices rebounding that demand becomes a larger and larger question. If rains are forecast for South America, be prepared to see sharply lower futures prices.

China confirmed the stockpiling of corn in the northeastern provinces through the end of April, at or near the cost of 2,000 Yuan per ton ($320/ton or 8.13/bushel); they’re planning on buying 10-12 million tons by the late January Lunar New Year.

We look for corn to open 1 to 3 higher and for beans to open 5 to 8 higher.

Daily CME spot market prices:

Block cheese: $1.5625 (unchanged)

Barrel cheese $1.535 (unchanged)

Butter: $1.6025 (unchanged)  

Grade A NFDM: $1.45 (unchanged)

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