Cheese/Class III Lower, Rest of Dairy Complex Well Supported
http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010237.pdf
12/8  Class III Futures:   Volume:  1,478  Open Interest (OI) Change:  +757   Total OI:  28,533
12/8  Class III Options:  Est. Put Volume:  498  Total OI:  21,799  Est. Call Volume:  494  Total OI:  20,905
12/8  Spot Markets:   Block Cheese $1.4450 (DOWN 5 1/2), Barrel Cheese $1.4025 (UNCH), Butter $1.6100 (UNCH), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
12/8  Other Dairy Futures Volume:   Butter:  56  Dry Whey:  106   NFDM:  42  Class IV:  14   Cheese: 3  International SMP:  0

12/8 Individual Class III Futures Prices, Change, Volume & Open Interest
Dec         $13.84                UNCH                   Vol:   186             OI Change:     DOWN 5
Jan 11      $13.20                DOWN 15             Vol:   380            OI Change:     UP 234
Feb 11     $13.19                 DOWN 7               Vol:   415             OI Change:     UP 241
Mar 11    $13.57                  DOWN 4              Vol:   131              OI Change:     UP 73
Apr 11     $13.93                 UP 2                      Vol:   46               OI Change:     UP 29
Jan-June 2011 Avg:     $13.76             DOWN $0.04/cwt
July-Dec 2011 Avg:      $15.31              DOWN $0.02/cwt
Jan-Dec 2011 Avg:       $14.53              DOWN $0.04/cwt

Class III futures were knocked backwards for the third straight session yesterday after a 5 ½ cent decline in the spot block cheese market.   Barrels had taken its lumps on Monday and yesterday’s CME spot activity brought the block/barrel spread back in line.   Futures activity remains brisk with good two-sided trading as hedgers look to add positions on both the buy and sell side of this market throughout all months in 2011.   The sharp price declines have been concentrated in Jan-Mar 2011 futures as those months have declined an average of 42 cents since last Friday.   In contrast, Apr-Jun futures have only lost a dime and July-Dec futures have only dropped four cents of their value since last Friday.   Look for the market to open mixed this morning based on overnight activity.

The cheese market stands alone in the dairy complex when it comes to price declines this week.   CME spot butter prices remained unchanged at $1.61 for the fourth straight session and butter futures shot upward yesterday with Feb-Dec futures up anywhere from a penny to three cents higher on moderate volume, pushing the Jan-Dec 2011 average to $1.6763.   Buyers are aggressively looking to lock in prices Mar-Dec with bids over $1.70 currently posted Aug-Nov 2011.  We have been impressed with the support this market has shown since the spot market’s drastic November price declines.    As long as CME stocks continue to decline and global butterfat stocks are still being reported as tight, butter prices will find support at or near these price levels.

In the powder markets, dry whey futures volume was quite strong yesterday with prices settling mixed from slightly lower to slightly higher.  The Jan-Dec 2011 futures average is currently priced at $0.3814 and the curve is ultra flat with the low at $0.3770 in Dec 2011 and the high at $0.39 in Jan 2011.  NFDM futures trading yesterday was moderate and concentrated to Jan-Apr 2011 with penny gains across those months.   Buyers appear to be the aggressors with bids at or near current market levels across all months through Dec 2011.   Unfortunately, offers are a penny above the market and are only posted in Feb & Mar.   Look for continued buyer interest at these levels and for NFDM to be supported here in the near term.

One of the reasons that dairy pricing is moderating at current levels is that New Zealand declared parts of the North Island including the dairy farming region of Northland to be a medium-level drought zone yesterday.  According to New Zealand Ag Minister David Carter, “The situation in Northland is serious.   Farmers are still recovering from last summer’s drought and they’re now facing it all over again, weeks earlier than expected.”    New Zealand is experiencing a La Nina weather pattern which is characterized by high early season temperatures but may produce more rain than usual later in the season.   That rain might be too late for dairy farmers, however.   It is a situation that is worth keeping a very close eye on over the coming few months.   http://www.bloomberg.com/news/2010-12-08/new-zealand-declares-drought-in-north-island-dairy-sheep-farming-areas.html

Speaking of Oceania milk production, Dairy Australia released their October numbers yesterday, up just 0.6% vs. last year.   Year to date (Jul-Oct), Australia milk production is only 0.2% higher from last year.  Not a great start.

Cooperatives Working Together (CWT) has initiated a membership drive to boost participation in the program for the next two years.  CWT needs a commitment from at least 75% of the nation’s milk supply to the two cent/cwt level in order for the assessment to go into effect.  http://www.cwt.coop/sites/default/files/news_releases/CWT-membership-drive-120810.pdf

The bipartisan efforts at what appears to be another stimulus package including a moratorium on US tax increases, extended unemployment benefits an a 2% payroll tax cut is putting strength into the US Dollar.  But it appears that grain traders opted to price in some risk premium ahead of the USDA crop production report to be released Friday at 7:30AM CDT.  Expectations are for a slight up tick in ethanol use and further declines in ending stocks.  Look for a slightly weaker opening on the grain complex this morning as traders position themselves ahead of tomorrow’s report.

Pakistan lifted their three year existing ban yesterday on wheat exports, allowing private exporters to now export an estimated 2 million tons.  The summer flooding that worried traders at the time turned out to actually be beneficial.

Oil World pegged 2011 Argentina biodiesel production at 2.5 million tons, up from 1.8 million tons in 2010, but exports are expected to drop slightly, from 1.42 to 1.40 million tons next year, due to a doubling of domestic usage.

Good day,
Dave Kurzawski & Eric Meyer
Downes-O'Neill, a division of FCStone
Phone:  312-456-3611
Fax: 312-588-0784  (Note New Fax #)
Cell:  312-953-3078
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