Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Last week ended with a Mother’s Day rally for dairy complex. Some tightness in milk production was being reported to us in the Midwest, though that was very isolated and didn’t seem to be the reasoning behind the rally. The story seems to be the same that cheese is stable to in balance and some product is moving via exports, while firm domestic demand has not allowed for a drop in pricing. The charts are beginning to look as though they have rounded a bottom here with the May to July pack up 55 cents on the week to 15.01, while the second half finally turned around and closed up 36 cents at 15.44.
The blocks gained ¾ of a cent after having lost 4.25 cents earlier in the week and the barrels gain ¼ of a cent after falling 2 cents earlier in the week. The spot cheese support, combined with the sizable rally seen in the dry whey market, triggered Class III gains. Futures closed double digits higher from June through the end of the calendar year, gaining 13 to 47 cents on strong volume of 1,387 contracts. But note that for the second time in two weeks, we have had a big spike up in price with an Open Interest decline. Last time we followed it up with a sharp selloff.
Throughout the week, we noted a number of co-ops continue to implement caps on over quota milk though producers are still generally trying to produce more milk to improve their profit margins. The biggest cap yet to come, however, will likely be weather. Forget about outlier events ― a normal U.S. summer will slow growth. Moreover, the one unknown is how producers will really respond to these beef prices. Will their margins be improved by the beef side of their business so much so that there will be a slight paradigm shift in how they deal in a low ― or no profit ― scenario? This is to say nothing of what lenders may choose to do.
In the grain complex, Friday saw a massive reversal of the bullish USDA soybean report as technical weakness combined with a record long fund position triggered a massive selloff. July beans closed down 49.25 cents at 1406, while new crop beans were down 37.75 at 1321.25, July corn closed 6.5 lower at 581 while new crop lost 2 cents to 505.25 and July wheat closed down 4.25 at 597. Corn and soybeans have broken through longer term technical support levels on old crop as the old crop/new crop spreads correcting. We continue to expect further fund liquidation in the coming weeks, provided the weather continues to cooperate this spring.
It seems to us that soybean acreage could be expanded sharply by the June report as early planting as well as a big change in the soy/corn relationship has occurred since USDA’s last acreage estimate. While the current USDA carryout to use ratio is the tightest ever, the increase in acreage could serve to alleviate that concern. Weather is now likely to be the key fundamental driver as we move past spring planting and into the summer growing season.