Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III futures kicked off the month of August on a mostly firm note as concern over hot temperatures Midwest temperatures and high feed costs keep selling at bay. The Midwest weather is controlling the market, tightening both available milk production and available fresh cheese production over the past few weeks. Commercial buyers are on the offensive, locking up prices well into 2012, while producers find it harder and harder to lay off their risk into a historically profitable — albeit inverted — pricing skew.
When the dust settled, over 1,400 contracts exchanged hands from unchanged to 22 cents higher. While the August and September contracts remained well-supported Monday, it was the 4th quarter prices that made a push to new highs in an attempt to reduce the massive spreads plaguing the forward curve for the past week. Still, the CME spot market left something to be desired for market bulls (closing lower for the first time since July 14th) and we anticipate that had it not been for the massive discounts on the 4th quarter pricing, such strength would have been hard to come by.
It is now a question of who will whittle away whom in the Spot market. On one hand, the fact that over 100 loads of block cheese came to the exchange in July is not overtly bullish — there is block cheese available. On the other hand, buyers have been resolute to not let block prices slip too far behind the seemingly tighter barrel market situation, which has not yet be solved. We expect to wade these choppy waters here again today. But the longer the prices stay on the defensive — rather than advance to the $2.20 level — the more vulnerable prices become to the downside.
The USDA Dairy Products Report ought to be perceived as bullish for the cheese category, though it may be priced in already as much of the talk over the past few weeks has been about a tighter fresh cheese supply situation, particularly in the upper Midwest. June American cheese production was 364.4 million pounds, down 1.5% from a year ago; Mozzarella cheese production in June was 298.0 million pounds, up 2.6% from a year ago a continued trend of stronger production vs. year ago levels. Though other cheese production came in above expectations, American production was well below, leaving total cheese production lower than expected by just over 5 million pounds.