Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III prices saw declines overnight, and it looked for a brief moment as though they would find support from the bullish USDA grain report Thursday morning. But that was short-lived. During the spot session, barrels were offered lower to start the price movement, falling by 6.5 cents on 4 trades — the first time we’ve seen more than one trade since July 6 and the last time we saw more than 3 trades in a week was June 13th through the 17th where 5 trades occurred. After the barrels stopped falling, sellers went to work on the block, pushing that price down 4.5 cents on 2 trades with a bid coming in just before a hard close.
Futures prices in 2011 got extremely volatile following the spot market, trading near limit lower in September, then bouncing back to just 40 lower and then moving back toward the lows again and settling limit down in Sept, 65 lower in Oct, and 38 lower in November. From Dec through August 2012 prices were steady to 8 lower.
Neither the Dow rallying 400 points nor grains gaining 25+ cents on corn and 30+ cents on beans could save the dairy markets yesterday. The trend is clearly lower and futures are indicating a strong belief that spot prices are going to continue falling and sharply. Producer margins took a big hit Thursday and it may not be over, though we are beginning to have a hard time believing September can continue to collapse at its current rate, it sits at 18.77 overnight about a 1.87 cheese equivalent.
About the only positive news today was June exports being up 19% vs. year ago on cheese and South Korea surpassing Mexico as our largest single cheese importer. 2 011 YTD cheese exports are up 48% vs. 2010.
There was interesting news on the corn front. A USDA report saw yield slashed much more than the trade was thinking for both corn and soybeans. However, given the large cuts in demand due to currently high prices, we did not think the yield estimates were all that bullish for corn, but the fact that acreage harvested declined by just 500,000 acres was likely what led to the very bullish reaction on futures. It seemed prices wanted to break throughout the day, and while they did come well off their highs intra-session, the stronger equities markets helped prop up corn.
Though it would seem to us more cuts to production are coming down the pipe, we continue to doubt the ability of the market to sustain demand above the 7.00 mark especially given the strong global wheat supplies and likely feed substitution that should occur. Though we have a difficult time seeing the bean yield falling as low as USDA projected yesterday, given the cooler August temps, it does seem to us that relative to corn both beans and wheat are a bit undervalued. We suspect current levels are about where they should be given today’s S & D and outside markets / demand is likely to eventually determine whether prices end up closer to 6.50 or 7.50 in the coming weeks. Contract highs at 7.2275 hang just above the market now as resistance.
Daily CME spot market prices: