Markets:

General:

AM price moves: USD -0.261 @ 79.195, Euro +68 @ 1.3227, Crude +1.35 @ 104.59, Copper +0.0760 @ 3.7920, Gold +13.4 @ 1,739.3,  Dow futures +42 @ 12,971, S&P +3.10 @ 1,362.80, NZ Dollar -1 @ 0.8332, Yen -43 @ 1.2546, Canadian +4 @ 1.0038

• Late Friday China announced they were lowering reserve requirements for their banks
• EU finance ministers announced they agreed to a bailout deal for Greece late Monday night
• Both of the items above triggered a drop in the USD Monday and things were rallying with crude oil up nearly $2.00 per barrel and above $105
• Australia’s central bank plans to keep rates unchanged despite the market expecting a jump in prior to their most recent announcement
• UK retail sales show an increase of 0.9% in January a surprise with forecasts of a 0.1% decline
• Today’s reports and the week ahead at a glimpse:

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2012033.pdf

2/17 Class III Futures:   Volume: 898 Open Interest (OI) Change: +118 Total OI: 33,572

2/17 Class III Options:  Est. Put Volume: 286 Total OI:  41,617  Est. Call Volume:  494 Total OI:  37,407

2/17 Other Dairy Futures Volume:   Butter: 106 Dry Whey: 65 NFDM: 205 Class IV: 81 Cheese: 290

2/17 Individual Class III Futures Prices, Change, Volume & Open Interest

Feb 12           $16.07           DOWN 3        Vol:   80          OI Change:            UP 11

Mar 12           $15.68          UP 5                 Vol:   224        OI Change:           DOWN 31

April 12         $15.63          UP 6                 Vol:   203        OI Change:           UP 10

Feb. to June Class III Avg.        $15.88             Up $0.03/cwt.

Feb. to June Class IV Avg.        $15.86 UNCH

Dairy: Class III and Cheese

Spot Markets:

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. 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 monthly increase in milk production in nearly four years! 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. Milk cows increased by 13,000 head from December to 8.5 million. Despite the high beef price, cow numbers continue to grow steadily due to the large heifer inventory. We’d look for sharp selling pressure come the Monday night opening with likely double-digit losses in the nearby months.

The question on trader’s minds will be how much – if any of this type of report is priced into the market. Price losses last week were already sharp with the second quarter pack losing 25 cents to close at 15.88. Much of the loses were in the second quarter this time around as the March contract actually gained 5 cents on the week.

While Class III traded moderate volume on Friday (898 contracts in total), Cheese futures showed a sharp increase in trading volume. 290 contracts traded hands and finishing the day mixed. The second quarter finished the week slightly 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 low enough to inspire a surge in cheese exports. 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.

Class IV futures saw jump in activity Friday trading 81 contracts in the April to June time period. Price finished the week unchanged to 3 lower in what was par for the course for quiet Class IV market of late. Trading interest in the Class IV contract remains light, if and when present, as a negative tone remains for coming trading sessions.

Monday night futures opened to sharp losses on very strong volume. Futures were lower by 15 to 23 cents from Feb through June, and prices were 5 to 12 lower from July through the end of 2012. By late night volume was over 250 contracts and prices were slightly off their lows down 16 to 19 cents through June and 4 to 12 lower in the second half of the year. By this morning volume had increase by about 20 contracts to 271, and March was down 23, while May was down 27 with other months in line with their overnight levels.

We look for milk to open sharply lower.

NFDM, SMP WMP:

The NFDM market finished the week mixed on heavy volume. Friday morning strong NASS numbers, which arrived north of $1.40, likely caused the slight bounce in the nearby contracts, while the second half of 2012 took the brunt of selling pressure and volume. Of the 205 contracts that traded Friday, 196 of them occurred in the July to December timeframe, leaving prices 0.50 to 2.00 lower on the day. December exports were at the lowest level on a daily average basis since July of 2010, when prices were in the mid $1.10’s. We look for continued price pressure across the board.

We look for NFDM to open mixed.

Butter:

Although spot butter prices fell to below $1.40 for the first time in two years, it failed to finish the week there. Spot butter traded 10 loads to a low of $1.3975 before being bid back to $1.4150 on Friday. The futures seemed to never fully buy into the spot weakness last week having traded mixed most of the week under oversold technical conditions. Futures don’t have to lead the way for butter, but they do have to follow – and they didn’t last week. Does that mean we’re bullish? No and we can underline that “no” with Friday’s milk production report numbers. But the market does seem to have trouble pushing lower and that might mean a bear bounce or corrective trade will ensue as we get into the pre-Easter holiday buying in March. We shall see.

A number of market participants are attending the Gulf food show in Dubai this week and we look forward to hearing the sentiment from the international community coming from that trade show.

We look for butter futures to open mostly lower.

Dry whey:

Dry whey futures showed a good two-sided trade during last week, though slight price declines should be noted. The second quarter, for example, fell 1.65 cents on the week from $0.5150 per pound to $0.4885. The Dairy Market News numbers continued to show some weakness as the central and western pricing series posted more declines on the low end of the pricing range. This weakness looks less like a one-off and more like organic weakness in the dry whey market, likely led by a decline in export business over the past 4 to 8 weeks. The one shining light is the continued buying coming from China, nearly all of this product is feed whey, and with the strong grain prices we would expect for demand to clean up most excess product off the market and likely limit declines below the 50 cent mark even with the strong milk production.

We look for whey to open lower.

Corn:
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 will need to supply 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.

We look for corn to open 4 to 6 lower, beans to open 2 to 4 higher, soymeal to open unchanged to 2.0 higher and wheat to open 5 to 8 lower.

Robert Chesler