Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III futures ended Friday on more of a mixed note and slower volume, although prices continued to drift marginally lower throughout the week. Although the spot market was stable to slightly higher on the week, slightly weaker dry whey prices as well as a lack of bullish news generally applied pressure to the Class III market with the exception of last Tuesday’s sharp “bear bounce.” To add bearish fuel to the futures market malaise was Friday afternoon’s post-close USDA Milk Production Report. Excellent milking weather throughout the winter has helped catapult milk production.
And it was a whopper.
The 23-state milk production came in 3.7% above a year ago at 15.78 billion pounds in January, the largest U.S. monthly increase in milk production since November 2007! Total milk production was stronger than anticipated as well — up 3.4 percent — due to an increase in both cow numbers and milk per cow. In addition to the strong milk production for January, the December milk production was also revised higher, marking the second consecutive month where revisions were made to the upside. The number of milk cows increased by 13,000 head from December to 8.5 million. Despite the high beef price, cow numbers continue to grow steadily — arguably due to the large heifer inventory.
While Class III traded moderate volume on Friday (898 contracts in total), cheese futures showed a sharp increase in trading volume. Two hundred and ninety contracts traded hands and finishing the day mixed. The second quarter finished the week at a hair over $1.60 ($1.608), so cheese continues to run a carry as does its brethren Class III. Current export business is quiet, and a $1.60 Q2 average may not be lower enough to inspire a surge in cheese exports. But it will be critical to watch for an uptick in export demand over the next few weeks as this is the time buyers ought to step in if they are going to.
Last week, corn found support from strong weekly corn export sales as larger than expected volumes, which could mean current USDA targets are too low. The total South American corn exports had been expected to grow substantially over last year. But, as dry weather impacted Argentina, corn traders had to adjust ideas back down to about the same export numbers as last year.
China signed deals to do business with Argentina last week. Will this take business away from U.S. farmers and provide some price relief for dairymen at the same time? Yes and no. At times when freight and currencies are not aligned, Argentina could get U.S. business. But the bigger picture is about population density and the world demand for corn, ultimately keeping prices aloft for the time being.
From a technical perspective, grains continue to chop in more of a sideways pattern more than anything else. It is too early to say for sure that the path of least resistance will form to the downside — especially this early in the year — but technical probability suggests price pressure, not strength.