The return of the 800lb gorilla back to the Cash cheese market had dairy traders in a "shoot first, ask questions later" mode, taking the entire dairy complex substantially lower, despite the already discounted paper market.  September Class 3 would struggle to gain traction throughout the session, eventually falling 75 cents per cwt, a.k.a "limit down" to $19.12 per cwt on the close.  October 2011 and April 2012 Butter futures as well as the entire fourth quarter 2011 NFDM futures also would settle down the maximum allowable daily limit (5 cents for butter and 2.5 cents for NFDM).  More selling is being witnessed across the dairy complex this morning with October Class 4 milk futures down 41 cents to $18.30 per cwt. Cheese futures are down as much as 1.5 cents in the September and November 2011 contracts, and September Class 3 milk is down another 50 cents.

A majority of traders believe that it will be a straight line lower from here on out, almost a rerun of how the market traded at the end of 2008.  I couldn't disagree more with that perspective.  The deferred 2009 futures contracts back during 2008, for the most part, started at $16 per cwt, traded up to over $20 per cwt and then finally collapsed, trading under $10 per cwt for some spring / summer contracts. Fast forward 3 years and we are looking at the 2012 contracts barely budging when the cash markets go up and barely budging when the cash markets go down.  When looking at Class 3 open interest as well as spot feed prices, I can tell that Commercial dairy buyers are unhedged in 2012 and that producers are in no position to lock up $300 per ton feed and get $17 milk for it.  I understand profits are not guaranteed and locking in a break-even price is better than losing money but there are major differences in todays market, compared to one witnessed 3 years ago.  

We are already seeing milk per cow plateau due to changes in rations.  This is creating milk deficits in some of the most concentrated dairy producing regions of the country.  Deficits in the midwest will continue, slowing down cheese production over the medium / longer term.  Also, why continue to run $7 per bushel corn through an animal when you can just sell the feed to the Ethanol plant?  Especially when the salvage value each of those dairy cows continues to climb.  Now i'm not saying that producers are losing money at todays prices, I am just making the case that producers will respond if dairy prices crash. In all of the madness yesterday, Dairy producers might have missed the news that despite the limit up move in the corn market, August Cattle futures also traded up the daily limit of $3 per cwt before closing $2.15 higher to $116.45 per cwt.  Cattle is normally punished on days where the corn market rallies hard.  Cash cattle markets are worlds apart from 2009.  Not a single Live Cattle futures contract during 2009 traded $90 per cwt or higher.  December Cattle last trade is $122.40 per cwt and climbing.  In fact some of the biggest managed funds in the world are licking their chops even at these prices. 

All in all, Im not saying we cant go down in the cash dairy market but I think the medium term response by the producer sector will be more hamburgers and less milk, resulting in a return to 2011 price highs.  Some might tell you different, but dairy producers don't need their processing sector counterpart to give the green light to implement growth management plans.  Simple economics, has and always will, trump politics.