With Class III prices at the seasonal (and annual) low, we are looking at the risk to thinning margins for dairy producers to start to build in some upside structure to this market.  Feed costs are expected to rise going forward as cost pressure will enter from both corn and wheat.  Recent widespread flooding across eastern Australia will likely translate to a significant reduction in wheat crop potential, and while the hard red variety will be impacted the most, the spillover will push wheat futures to higher levels, affecting the feed market in the months ahead.  This may be the first year in four where the global wheat supply moves back into net deficit status, so price ramifications have the potential to ripple through the secondary industries; keep this in mind when evaluating potential in the CPG sector during 1Q/2Q11. 

Fortunately, production conditions in the US have been favorable in 2010, but with the current market, any acute weather shock will start to affect Class III prices as well.