Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Nearby Class III futures reversed course Thursday, trading sharply higher on less volume than the previous lower day and with very limited OI increases vs. prior day. Early market consolidation gave way to pre-report short covering, which was exacerbated by continued buy interest in both blocks and barrels and pushed nearby prices over .30/cwt higher by the closing bell. To the confusion of many, block cheese has edged higher on bids only ― again ― while barrels continue to trade at $1.46.
Let the head-scratching commence.
One main question we’ve been fielding all week is how can the CME cheese market go higher with such weak global prices? In short, it is by design a domestic market. Although international dealings can have an influence, the main function of the CME spot markets is for the management of U.S. inventory. It is likely the most expensive method of inventory management compared to deals consummated in the country directly between buyers and sellers, but it is a viable route of last resort for the last loads needed to be bought or sold. As a result, we can be inundated with weak global price reports and talk about of rivers of milk, but if there’s little fresh cheese available for sale in Chicago, prices can rise (or vice versa). We may be in one of those times right now. Speaking of rivers of milk….
Milk Production Report:
In our opinion, yesterday’s milk production report was neutral to slightly bearish. According to the USDA, Total U.S. milk production was up 4.2% over last year against our estimate for an increase of 4.5%, which is bearish. However, the numbers arrived on the low end of pre-report expectations.
Once again, the previous month production saw a revision to the upside as total U.S. production for February was increased by 17 million pounds from last month’s initial estimate due to cow numbers being revised higher by 4,000 head. March total milk production came in at 17.70 billion pounds. Milk per cow for the all of the U.S. came in at 1,910 pounds, which was below our expectation of 1,916, leading to the overestimate of production. Total cows were at 9.27 million head, an increase of 16,000 over the initial February estimate. In futures trading, since the report, very little impact has been seen with nearby months still sharply higher on a stronger spot market. From a longer-term perspective, the increase in cow numbers is perhaps the most important factor in Thursday’s report, though given the strong slaughter rates and action taken by cooperatives we’d expect to see those numbers level out in the next few months.