Markets:

AM price moves: USD +0.331 @ 80.735, Euro -54 @ 1.2870, Crude -2.04 @ 94.09, Copper -0.0745 @ 3.5740, Gold -21.0 @ 1,563.0,  Dow futures -82 @ 12,706, S&P -12.30 @ 1,337.70, NZ Dollar -71 @ 0.7753, Yen -25 @ 1.2498, Canadian -43 @ 0.9947

General:

• China cuts bank reserve ratio to stimulate economy following data signaling economic slowdowns (3^rd cut since Nov)
• Goldman reports it expects China to spend more on infrastructure to support growth
• New elections loom in Greece after failed attempt to form a coalition
• European stock markets fall as much as 2% on Greek issues
• Moody’s targets Spanish banks as “vulnerable” following new rule implementation
• Saudi comments help push crude lower: concerns over Greece, rising inventories etc.
• Plain and simple; today is another “risk off” day as the USD surges for the 10^th session and most “things” all on someone’s foot and hurt
• Today’s reports and the week ahead at a glimpse:

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2012092.pdf

5/11         Class III Futures:  Volume: 1,387 Open Interest (OI) Change: -62  Total OI: 26,451         

5/11         Class III Options:  Est. Put Volume: 448 Total OI:  34,249   Est. Call Volume:  207 Total OI:  31,507

5/11         Other Dairy Futures Volume:   Butter: 37  Dry Whey: 35  NFDM:  49  Class IV: 0  Cheese: 241

5/11         Individual Class III Futures Prices, Change, Volume & Open Interest

May 12   $15.26     UP 2                        Vol:   103                OI Change               DOWN 77

June 12   $14.89     UP 47                      Vol:   572                OI Change:              DOWN 65

July 12    $14.89     UP 35                      Vol:   415                OI Change:              UP 32

Aug 12    $15.22     UP 40                      Vol:   111                OI Change:              DOWN 19

May to July Class III Avg.                  $15.01                     UP 26

May to July Class IV Avg.                   $13.49                     UP 2

Dairy: Class III and Cheese

Spot Markets:

Thursday the class IV markets found a bid and Friday the spot cheese market came along. 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 2^nd time in two weeks we have had a big spike up in price with an OI decline, last time we followed it up with a sharp selloff... Some tightness and drop off 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. As noted above though much of those gains can be attributed to the strength in dry whey futures and in the nearby months partially to a discounted market relative to the spot prices.

Throughout the week we noted a number of coops were moving to enforce hard caps on milk production or impose price penalties on anything over quota and while the class III market never fell to the depths that the class IV market did perhaps that is why such strong gains were seen in the class IV products relative to the cheese market late in the week. Many of these changes however are likely to line up with the end of the school year starting in June and July and while we think this can be more bullish longer term the market is still very exposed to another decline in pricing in the coming weeks as schools close for the summer. Producers must still be on guard for further declines early this week additional protection should be sought out.

Cash cheese saw sizeable gains on Friday with the support garnered from the spot session gains. From June through October prices were higher by 1.000 to 2.500 cents and volume was very strong at 241 contracts. Participation in this contract continues to push open interest higher as we ended the week at 10,056 contracts vs. just 2,074 a year ago and a new record.

Class IV prices stabilized late in the week as a bid came back into the market with pricing rebounds for the products. Despite the large gains seen in the products class IV futures actually saw lower pricing last week with the May to July pack down 19 cents to 13.49 while the second half pack lost 48 cents to 14.03.

Overnight Class III traded 79 contracts with June the most active (61 trades) and up the most (12 cents). Cheese futures traded only 1 time in June slightly lower, all other dairy markets were silent.

We look for milk to open firm but weaken into spot. 

NFDM, SMP, WMP:
NFDM continued the late week rally on Friday closing higher from June through November by 0.500 to 3.500 cents on firm volume of 49 trades. On the week the May to July pack average gained 2.25 cents closing at 117.167 while the July to Dec pack was up 2.033 cents to 119.871. The market turned around mid-week with a flurry of pricing reports; the Western Mostly midpoint price was 3.00 cents lower at $1.1250; CWAP was $1.2531, up 1.89 cents from the previous week and weekly NDPSR pricing was down 0.0006 cents to 1.2169. While none of those reports was particularly bullish the lack of sharper declines turned discounted futures higher. The question now is have we bottomed? We certainly don’t think that will be the case. On Thursday and Friday, the two days which saw significant price gains, volume was 67 total trades as bids seemingly disappeared however open interest increased by only 6 contracts so it looks to us as though this is more of a short covering rally. With GDT coming Tuesday the market may find more fuel to the bullish fire or the rally may more likely be extinguished.     

We look for NFDM to open firm.

Butter:

The rebound in spot butter Thursday extended into Friday as the spot market gained 1.75 cents to 1.3200 triggering another bounce in butter futures as well. Only one month settled lower Friday, Aug down 1.100 while other contracts from June through Jan 2013 were higher by 0.750 to the limit 5.000 cents in June. The $1.30 mark appears to have held and become strong support now with the big bounce in futures. On the week the May to July average was up 3.258 cents to 133.000 while the second half pack was up 1.596 cents to 140.758. The situation with butter seems to be much the same as with non-fat as on Thursday and Friday when prices were rebounding the total volume was 68 contracts and open interest actually fell by 4 contracts between the two days. Perhaps buyers will enter the market and continue the rally but for now we’ll chalk this up to a short covering rally as well and look to GDT Tuesday morning for a sign of continued weakness of global fat pricing.

We look for butter to open firm.

Dry Whey:

We look for whey to open steady.

Grains:
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.   

We look for corn to open 2 to 4 lower, for beans to open 22 to 25 lower, for meal to open 7.0 to 8.0 lower, and for wheat to open 2 to 4 lower.

Robert Chesler