Markets:

AM price moves: USD +0.104 @ 79.305, Euro -26 @ 1.3138, Crude -0.34 @ 104.88, Copper -0.0295 @ 3.7560, Gold -8.5 @ 1,645.5,  Dow futures -14 @ 13,190, S&P +2.40 @ 1,399.90, NZ Dollar -66 @ 0.8014, Yen -33 @ 1.2447, Canadian +34 @ 1.0160

General:

· Turkey’s annual CPI highest since 2008

· Europe stocks gain in front of ECB meeting

· Asian stocks fell on Chinese bank losses

· NZ jobless rate unexpectedly rises to highest level since 2010

· Uncertainty is keeping a firmness to the USD again today; a theme for the week

· Today’s reports and the week ahead at a glimpse:

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2012085.pdf

5/2 Class III Futures:  Volume: 965 Open Interest (OI) Change: -180 Total OI: 29,849

5/2 Class III Options:  Est. Put Volume: 493 Total OI:  33,633  Est. Call Volume:  609 Total OI:  30,697

5/2 Other Dairy Futures Volume:   Butter: 118 Dry Whey: 16 NFDM: 6 Class IV: 0 Cheese: 158

5/1 Individual Class III Futures Prices, Change, Volume & Open Interest

April 12           $15.72            DOWN 1            Vol:  0             OI Change:            DOWN 225

May 12            $15.13            DOWN 14          Vol:  320        OI Change:            UP 11

June 12           $14.59            DOWN 24          Vol:  348        OI Change:            DOWN 8

July 12            $14.84            DOWN 34          Vol: 132         OI Change:            DOWN 3

May to July Class III Avg.        $14.82             Down 27

May to July Class IV Avg.        $13.74 DOWN 5

Dairy: Class III and Cheese

Spot Markets:

As the ADPI and USDEC meetings have finished up, as we discussed yesterday, the sentiment is in large part bearish.

The spot market started with the block and barrel spread continuing to correct, adding some bounce along with the open in the morning, but it all turned south from there.

The Class III market came and went on almost medium volume, only 965 contracts traded, and they didn’t hold back. After the spot butter market, futures started selling off and had no intention of stopping. The bears got their way and even pushed July into the $14.84 range. July lead the way down, losing 34 cents, but June and the rest of the 2012 complex didn’t want to be excluded from the party. They all sold off anywhere from 2 – 24 cents. The trade for 2013 was somewhat mixed, up 5 cents in February and 2 cents in January, selling off in March and April. There continues to be pressure on the second half of 2012 but not what we are seeing in the May – August contracts. While the rally Tuesday was a significant break from norm, we waited for the selling to come and it manifested itself yesterday as expected and noted in yesterday’s commentary. We expected this because of the OI decline as prices rose, telling us it was probably short covering that we felt wouldn’t sustain a trend. Yesterday while it appears on the surface of it that OI declined again, alongside price declines, in fact if you remove April OI actually increased. The release of the Dairy Products Report today showed what we expected… more milk, more product.

Most expected the blocks portion of the spot market to fall in sympathy with the recent declines realized in the barrels, but traders had different plans. The barrels market actually rose 3 cents with no volume. The subsequent futures rally was short lived, and when spot butter started the Class III and cash settled cheese markets turned around very quickly. As with the Class III, the July contract led the way lower down 34 cents to $14.84, with June close behind down 24 cents to $14.51. The May to June average is $14.85 and the July to December average is $15.54. Cheese futures did the same, selling off and selling off hard on 158 contracts traded and the biggest loser being June, off .029 cents, settling at $1.497. The May to June cash cheese average is down to $1.514.

Class IV started May as it ended April, failing to register a single trade, yet still posted losses in a couple contract months. The July contract lost 15 cents to settle at $13.97 and August contract lost 30 cents settling at $14.33.

Overnight Class III traded 49 times with prices steady to 13 lower. Cash cheese futures traded 22 times in similar price fashion. Butter also traded once at ¾ of a cent lower in August and that was all for the overnight dairy session.

We look for milk and cheese futures to open lower.

To follow up on the Mad Cow case, according to Bloomberg News. “A calf of the 10-year-old California dairy animal found to have mad cow disease tested negative for the illness after being euthanized, the U.S. Department of Agriculture said. That animal, which was found in another state, and a stillborn calf born to the diseased cow are the only progeny that have been identified, the USDA said today in an e-mail today. The statement didn’t say if there were other offspring. Two dairies associated with the case are now quarantined, the department said. A calf ranch where the infected cow had been raised 10 years ago is also being investigated, the USDA said. No animals from the cow’s birth cohort have been found, it said.”

The Dairy Products report released yesterday contains estimates of March 2012 dairy product production, as well as manufacturer’s end-of-month stocks for dry proteins and lactose.

Our interpretation of this report is as follows:

• Butter— neutral. Butter production in March was 176.0 million pounds slightly lower than our expectation for 181.6 million pounds. Year over year production increased by 6.4% while on a daily average basis production was down 2.8% vs. February. March showed a slight shift in production away from butter and powder and into cheese.
• Cheese—bearish. March American cheese production was 382.5 million pounds, up 4.1% over last year and up 2.8% on a daily average basis from February. Mozzarella cheese production in March was 316.2 million pounds up 2.8% month over month on a DAB. Total cheese production was 946.3 million pounds up a striking 17.7% from a year ago and also up 3.2% month over month. The production numbers show a clear shift from class IV back into cheese production and should mean lower cheese prices relative to the class IV products in the coming weeks.
• Nonfat dry milk— bearish. Nonfat production in March was 188.6 million pounds, up very sharply from a year ago by 49.9%. The pattern of firm NFDM production continued to grow relative to the SMP production which came in at 11.9 million pounds down 71.5% from the year prior continued weakness on export demand for powders is adding to the NFDM futures price pressure. Inventories of NFDM spiked as well climbing by 8.8% over February to 210.3 million pounds. Price pressure should continue on NFDM futures.
• Dry whey— neutral. Dry whey production saw a large shift in production type this month as human production was down 7.5% vs. last year and down 6.3% on a daily average basis from February. Animal production however saw a large increase up 17.1% from last year and up 10.0% from February on a DAB. Total dry whey production was down 4.3% vs. last year at 90.2 million pounds as WPC production pulled product away from dry whey. With the lower total production total dry whey stocks declined by 7.0% from February and down 5.6% year over year.
• WPC—bearish. Total WPC production was up 2.7% on a DAB from February at 38.9 million pounds. Interestingly by product type more human product was produced for WPC vs. animal type. Human production was 36.3 million pounds up 6.3% year over year while animal production was down 3.6% year over year. Stocks of WPC were on the rise across the board as human stocks were 45.2 million pounds this month a 57.0% jump over last year and a 15.7% increase from last month alone. Total stocks increased by 55.8% over last year and 15.4% from February. With the increased cheese production came increased whey production and larger stocks.
• Lactose—neutral. Lactose production saw a jump this month coming in at 89.9 million pounds a 5.4% increase over last year and up 3.5% on a DAB from February. Stocks however did not show as significant of an increase despite the strong production levels so it would appear demand is relatively firm. Total stocks were 74.0 million pounds up 0.5% from last year and up 5.2% from last month.

Dairy Production Highlights, March 2012(%Change Year Over Year):

American cheese production, 382.27 million pounds, up 4.10%
Mozzarella cheese production, 316.19 million pounds, up 2.20%
Butter production, 176.01 million pounds, up 6.40%
Nonfat dry milk production, 188.62 million pounds, up 49.90%
Skim milk powders production, 11.91 million pounds, down -71.50%
Milk protein concentrate production, 10.94 million pounds, up 12.60%
Dry whey total production, 90.23 million pounds, down -4.30%
WPC total production, 38.88 million pounds, up 5.60%
Lactose production, 89.93 million pounds, up 5.40%

Inventory Highlights, March 2012(%Change Month Over Month):

Nonfat dry milk inventory, 210.29 million pounds, up 8.80%
Dry buttermilk inventory, 21.93 million pounds, up 11.40%
Dry whole milk inventory, 6.96 million pounds, down -4.70%

Dry whey inventory, 48.12 million pounds, down -7.00%
Lactose inventory, 74.03 million pounds, up 5.20%
WPC total inventory, 47.13 million pounds, up 15.40%

NFDM, SMP, WMP:
The nonfat futures only posted 6 total trades in the down session trending with the rest of the complex. Prices ranged from 2 ½ cents lower in August and September to marginally lower in May and the rest of the second half. Traders watched as the dairy products report came in very bearish. May finished at $1.18975 and August was down $1.13500. We suspect there is a decent chance real world spot prices get pretty close to support levels of 80 cents by the end of July.

We look for NFDM to open lower.

Butter:

Butter had a similar day to the rest of the dairy complex, coming into a light trade day and selling off hard post spot. Butter futures were down through December, ranging anywhere from ¾ to a 1.85 cents lower with 106 trades on the day. The front months took the worst of the pounding with May settling at $1.33 and June at $1.34150. The “coolers’ are filling up, CA continues to run max capacity and we look for spot butter to make its way toward $1.25/lb.

We look for butter futures to open soft.

Dry Whey:

Whey traded light volume registering 16 trades on the day, but that was enough volume to lift the front month futures a bit. We added 2 cents in June, to finish at $0.46 and were up marginally in May and July. We see whey coming for some type of short term bounce waiting for pricing and volume reports to continue to reflect the bearishness of the entire complex. Mid 40 cent whey is an attractive buy level and futures have chopped to and fro form that level in deferred contracts.

We look for whey to open mixed to lower.

Grains:

Grains came off the board yesterday with the May and July futures ending 17 ½ cents lower. New crop came in lower as well by 11 cents. Many are pointing to funds getting out of long positions in what looks like something of a correction in trading. The weather has been good and the planting seems to be progressing so that has helped push all the grains down. May corn settled at $6.42 1/4. Beans were lower as well, coming off the board in many months, trading 17-29 cents lower all the way through 2015. May beans settled at $14.80. Yesterday July made a higher high and then closed on a low and that is typically a sign of bearish continuation but we will proceed cautiously ahead.

We look for corn to open 1 to 2 higher, for beans to open 2 to 4 higher, for meal to open mixed and for wheat to open 4 to 6 higher.

Robert Chesler