DAIRY GRAIN AND R E P O R T. January 25, 2013 Volume 17 Number 4

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1 DAIRY GRAIN AND R E P O R T Volume 17 Number 4 Week Market 25-Jan 18-Jan 11--Jan 28-Dec -4% 7% Barrel Cheddar (CME average; lb) $ $ $ $ $ % 10% Block Cheddar (CME average; lb) $ $ $ $ $ % -3% Butter (CME average; lb) $ $ $ $ $ % 10% Nonfat Dry Milk (AMS Central AOM; lb) $ $ $ $ $ % -12% Dry Whey (AMS Central AOM; lb) $ $ $ $ $ % -18% WPC (AMS Central/West AOM; lb) $ $ $ $ $ % 10% Dry Buttermilk (AMS West AOM; lb) $ $ $ $ $ % 2% Class III Futures (CME 2nd nearby; cwt) $ $ $ $ $ % 7% Cheese Futures (CME 2nd nearby; lb) $ $ $ $ $ % 1% Cash Butter Futures (CME 2nd nearby; lb) $ $ $ $ $ % -16% Dry Whey Futures (CME 2nd nearby; lb) $ $ $ $ $ % 13% NDM Futures (CME 2nd nearby; lb) $ $ $ $ $ % 8% Class IV Futures (CME 2nd nearby; cwt) $ $ $ $ $ % 12% Corn (CBOT nearby; bu) $ $ $ $ $ % 18% Soybeans (CBOT nearby; bu) $ $ $ $ $ % 20% Wheat (CBOT nearby; bu) $ $ $ $ $ % 29% Soymeal (CBOT nearby; ton) $ $ $ $ $ % 1% Soyoil (CBOT nearby; lb) $ $ $ $ $ % -8% Cocoa (ICE nearby; ton) $ 2,182 $ 2,300 $ 2,256 $ 2,224 $ 2,251 0% -24% Sugar #11 (ICE nearby; lb) $ $ $ $ $ % -46% Orange Juice (ICE nearby; lb) $ $ $ $ $ % -32% Coffee (NYMEX; lb) $ $ $ $ $ % 0% Lean Hogs (CME nearby; lb) $ $ $ $ $ % 1% Live Cattle (CME nearby; lb) $ $ $ $ $ % 29% Natural Gas (NYMEX nearby; mmbtu) $ $ $ $ $ % -4% Crude Oil (NYMEX nearby; bbl) $ $ $ $ $ % -2% Unleaded Gas (NYMEX nearby; gal) $ $ $ $ $ % 0% Heating Oil (NYMEX nearby, gal) $ $ $ $ $ % 10% Dow Jones Industrials 13,865 13,626 13,484 13,438 13,007 0% 12% NASDAQ 100 3,146 3,131 3,125 3,106 2,977 1% 14% S&P 500 Index 1,500 1,484 1,471 1,467 1,410 1% 2% Euro/Dollar % -1% Canadian Dollar/Dollar % -4% Gold $ 1,658 $ 1,687 $ 1,660 $ 1,658 $ 1,654 BLIMLING AND ASSOCIATES, INC 5201 EAST TERRACE DRIVE, SUITE 280 MADISON, WI INFO@BLIMLING.COM 2013 Blimling and Associates, Inc. This report is prepared for the exclusive use of Blimling and Associates clients. Reproduction in part or in whole without permission is strictly prohibited. This information is carefully compiled, but not guaranteed to be complete or free from error; nor does it constitute a solicitation to buy or sell futures/options contracts. Futures and options trading involves risk. Contact a licensed professional for more information.

2 Cheese Prices Falter Again Amid Rising Milk Production W ith barely a whimper, the cheddar cheese market was knocked down another peg this week, putting barrel prices at seven-month lows and taking block prices to a place not seen since July. Barrels finished at $ per pound, down $ and the biggest week-to-week decline since mid-november. Blocks closed at $ per pound, down $ Trading activity was comparatively light, with four cars of blocks and 10 cars of barrels changing hands. Talk around the day-to-day market has not changed much, with seasonal demand malaise and better-than-anticipated supply figuring in most conversations. The latter certainly garnered attention on Tuesday, when the latest USDA/NASS Cold Storage report showed robust inventory growth from November to December. Total cheese stocks stood at 988 million pounds on December 31. That was up 46 million pounds from November, a significant advance over the five-year average build of 13 million. Moreover, the 4% yearover-year stocks deficit that prevailed in November was eliminated; stocks were flat versus December 2011 levels. Numbers for the American-type segment were similarly oriented if not quite as pronounced. Stocks stood at 605 million pounds, up 24 million from November (compared to +5 million on average over the past five years) and down 1.0% year-over-year. Any bearish flames lit by those numbers were only fanned a day later when the USDA/ NASS Milk Production report showed better-than-anticipated farm output in December (see below). In short, the market is CME SPOT CHEDDAR PRICES long. Not that price did not already suggest as much. Sixty or $1.84 ninety days ago, seemingly few imagined that CME spot values $1.80 would be in the area. That the market has arrived at such a destination already implied a measure of unanticipated $1.76 supply-side strength. Now the pressing question may be: have $1.72 prices gotten low enough to buy back some demand? Last year at this time, wholesale/cme pricing in the low-150s ended up $1.68 spurring decent domestic promotional activity (and corresponding demand growth) for the second and third quarters. $1.64 Second half export prospects also got a boost. It would not $1.60 surprise some observers to see strains of similar response $1.56 begin to emerge this time around. On the CWT front, the pro- Nov 26 Jan 25 Barrels Blocks 1,100 1,050 1, TOTAL CHEESE STOCKS Million Pounds Jan Mar May Jul Sep Nov THE TAKEAWAY (1) Cheese prices continue to slide, blocks dropping $ to $ and barrels below the $1.60-mark at $ (-$0.0650). (2) Butter content with steady prices at $ (3) Milk Production report shows that US dairy farmers pulled through once again -- December output up 1.6%. (4) Butter inventory is up -- stocks are 43% higher year-over-year. (5) Grains were mixed -- corn falling to $ and soybeans climbing to $

3 gram was used this week to facilitate sales of another 3.8 million pounds of cheese for export. FUTURES PRICES WERE LOWER, befitting lower spot cheese prices. But, as has been the case over the past few weeks, nearby values took a bigger hit than deferred values. January through June 2013 contracts closed at an average of $17.60 per hundredweight, down 18 cents; July through December contracts finished at 18.37, down eight cents. $18.90 $18.70 $18.50 $18.30 $18.10 $17.90 CLASS III MILK "PACKS" THE USDA/NASS MILK PRODUCTION REPORT OFFERED a blunt reminder that high milk prices creative incentive, even in a high feed cost environment. Amid expectations for unchanged yearover-year output, producers actually pushed output in December 1.6% higher -- the largest gain since May. For all of 2012, production topped 200 billion pounds, up 1.7% from Producers with the highest presumptive margins pumped out the biggest gains. Midwest production climbed 4.8%, with even better performance in Wisconsin and Michigan (both at +5.5%). California production still lagged year-prior levels, although only by 2.3%, a slimmer margin than seen over the summer. A similar pattern exists in the Southwest, where production has fallen by an average of 3.5% for the past seven months, making the December decrease of only 0.5% seem like a vast improvement. The most surprising news might have been the month-tomonth increase in cow numbers: 16,000 head. Herd expansion even with elevated slaughter rates suggests a well-stocked heifer pipeline. THE COLD STORAGE REPORT PUT TO REST any lingering doubts about just how much butter is around. The USDA reported million pounds in warehouses at the end of December, up 43% year-over-year. Even more impressive, and endorsing earlier reports of lackluster holiday sales, inventories expanded from November to December by 25.6 million pounds, almost five times the five-year average. With the spot market stuck in neutral opening and closing the week at $ per pound with four loads changing hands the stocks report took center stage in the futures market. Once the news hit the wires, early in the week gains quickly turned into losses. The trend continued through Friday, with the first half average finishing at per pound (-$0.0129) with the second half average settling at $ (-$0.0014). Volume picked up as well 610 contracts changed hands another clue that manufacturers may indeed have ample butter on-hand. And, given current cream prices, the churns appear to have plenty of raw material with which they can work. USDA/AMS data implied multiples in the 118 area. Though up slightly on the week and up eight points $17.70 $17.50 $17.30 Nov 26 Jan 25 Jan-Mar 2013 Apr-June (50) (100) (150) (200) (250) DAILY MILK PRODUCTION Million Pounds (30-Day Months) Jan Mar May Jul Sep Nov US COWS: YEAR-OVER-YEAR Thousand Head 10 May Sep 11 May Sep 12 May Sep Jan Jan Jan 3

4 $1.70 $1.66 $1.62 $1.58 $1.54 $1.50 Dec 6 Jan ,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 JAN-MAR 13 BUTTER FUTURES BUTTER STOCKS Million Pounds Jan Mar May Jul Sep Nov CHINA SMP/WMP IMPORTS Metric Tons Source: GTIS WMP SMP versus last year, cream is still relative inexpensive. In an effort to clear some of the inventory hangover, CWT announced export bonuses on 2.4 million pounds. NONFAT DRY MILK PRICING REMAINS UNEVEN, but basically steady. There is some intrigue around whether one metric is moving this way while another is moving that way. It is all fractional movement, though. And, the net result is an overall price that remains in the mid-150s. Dairy Market News reported an unchanged Central states average at $ per pound, while a quarter-cent was shaved off the Western price at $ Survey prices did manage to bounce, with the NDPSR at $ per pound (+$0.0232) for the week ending January 19, and the January 18 CWAP climbing nearly a penny to $ One thing that did change this week: futures activity percolated, with volume reaching 255 contracts, a marked increase from last week s total of 96. Yet, as with the various spot measures, prices did not really change all that much, especially for nearby contracts. The first quarter average closed at $ per pound, a slight $ increase. Deferred contracts saw the only notable changes, where penny gains kick-started an upward push mid-week. The third quarter managed to tack on $ per pound, pulling the average up to $ It is always interesting to see sell-side liquidity emerge in the futures market but it takes two to tango, of course, and the fact that buyers were waiting and willing might say something, too. In the international arena, trade data published by GTIS shows that China s powder appetites are still healthy. In December, combined SMP and WMP imports equaled 54,061 metric tons, up 50% year-over-year, bringing the 2012 total to 570,210 metric tons, a 27% increase (122,000 tons) from China s biggest supplier, New Zealand, was in the news on Thursday. Companies withdrew pasture fertilizer products from the market after tests revealed milk containing low levels of dicyandiamide an active ingredient in a substance sprayed on pastures to control nitrogen losses. While toxic to humans in high doses, low levels are not considered a food safety concern. However, as some countries enforce a zero tolerance standard, the leading fertilizer suppliers have suspended sales to the dairy industry to avoid disrupting trade, despite over 30 years of commercial use on New Zealand farms. EAGER TO CLOSE THE GAP with prevailing spot/survey prices, dry whey futures forged higher. The first half average gained $ to $ per pound. With futures values at a significant discount, survey prices moved lower for the second consecutive week, helping to bridge the gap between the two. 4

5 The NDPSR reported whey prices at $0.6449, down $ Meanwhile, USDA/AMS Dairy Market News conveyed the Western average at $ (-$0.0125), below the 60-cent mark for the first time since October. The Central states average also lost $ to settle at $ per pound, the lowest price in ten weeks. China imports were also on the decline, dropping to 32,111 metric tons, down 33% year-over-year. For the year however, 2012 imports outpaced 2011 by 10% or 34,132 tons. GRAINS PRICES WERE DECIDEDLY MIXED with March corn moving up down $ to settle at $ per bushel but March soybeans closing the week at $ , up $ Corn export sales also remain soft, with marketings to date only totaling to 524 million bushels, off by 528 million. The US could presumably make the USDA number of 950 million bushels, but only if sales start accumulating at a much faster rate. The export number will probably not affect the ending stock number in a bearish way as it appears to be low enough already. Ethanol production, on the other hand, appears to be weakening, which could ultimately affect price. If production continues to soften, corn bushels will be added to the pile at the end of the marketing year. If ethanol production picks up, however, an already tight situation becomes tighter. And, form there, things still might depend on how corn is being used by livestock feeders. Currently, the USDA estimate in that arena appears to be on the higher side. March soybean oil finished higher, closing at cents per pound, up Chinese crush margins are well into the black as that nation continues to support the complex through US-origin imports. March wheat futures, on the other hand, lost $ to settle at $ per bushel. Export sales remain decent and there appears to be no change in moisture prospects for the West but those factors may already be priced into the market. ENDQUOTE: Policy actions have lowered acute crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term. At the same time, policies have supported a modest growth pickup in some emerging market economies, although others continue to struggle with weak external demand and domestic bottlenecks. If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks. -- International Monetary Fund JAN-MAR 2013 NDM FUTURES $1.61 $1.59 $1.57 $1.55 $1.53 Sep Oct Nov Dec Jan JAN-MAR 2013 WHEY FUTURES $0.65 $0.63 $0.61 $0.59 $0.57 $0.55 Sep Oct Nov Dec Jan CBOT CORN FUTURES $8.00 $7.75 $7.50 $7.25 $7.00 $6.75 Sep 13 Jan 25 5

6 PRICE AND VOLUME DATA Week Week Ending 19-Jan 12-Jan -1% 10% NDPSR Block Cheddar (lb) $ $ % 8% NDPSR Barrel Cheddar (lb) $ $ % -7% USDA/NDPSR Butter (lb) $ $ % 15% USDA/NDPSR NDM (lb) $ $ % -9% USDA/NDPSR Dry Whey (lb) $ $ % 29% NDPSR Block Cheese Sales (mil lbs) % 12% NDPSR Barrel Cheese Sales (mil lbs) % -27% NDPSR NDM Sales (mil lbs) Week Week Ending 25-Jan 18-Jan 15% 1% Class III Futures Volume 5,012 4,346 7% -39% Class III Futures Open Interest 20,543 19, % -8% Cash Butter Futures Volume % -33% Cash Butter Futures Open Interest 3,087 2, % -13% Nonfat Dry Milk Futures Volume % -36% Nonfat Dry Milk Futures Open Interest % -75% Dry Whey Futures Volume % -49% Dry Whey Futures Open Interest 1,543 1,518 CME CASH CHEESE AND BUTTER MARKETS BLOCK CHEDDAR 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan Total High Trade $ $ - $ $ - $ - Low Trade $ $ - $ $ - $ - Settle $ $ $ $ $ Volume Unfilled Bids Uncovered Offers BARREL CHEDDAR 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan Total High Trade $ $ - $ $ - $ - Low Trade $ $ - $ $ - $ - Settle $ $ $ $ $ Volume Unfilled Bids Uncovered Offers GRADE AA BUTTER 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan Total High Trade $ - $ $ $ - $ - Low Trade $ - $ $ $ - $ - Settle $ $ $ $ $ Volume Unfilled Bids Uncovered Offers SMP/NDM USA EU AU/NZ in US Dollars $ 3,450 9% -1% $ 3,588 18% 3% $ 3,475 3% 1% in Euros 2,590 6% -1% 2,693 15% 1% 2,608 0% 0% BUTTER USA 3 EUROPE 2 AU/NZ in US Dollars $ 3,282-6% -1% $ 4,538 3% 2% $ 3,350-15% 2% in Euros 2,463-9% -2% 3,406-1% 0% 2,515-18% 0% WHEY USA 1 EUROPE 2 in US Dollars $ 1,378-12% -5% $ 1,412 2% 0% in Euros 1,034-15% -7% 1,060-1% -2% CHEDDAR CHEESE USA 3 WORLD MARKET MATRIX AU/NZ in US Dollars $ 3,756 10% -3% $ 4,000-3% 0% in Euros 2,819 7% -5% 3,002-6% -2% 6