Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
Class III futures came under a “small craft advisory” after hitting a rough patch of sea last Friday. The market finished sharply lower after blocks came under heavy fire on the spot market. May-June contracts took the brunt of the pressure; the 2Q 2014 pack lost 52¢ on the session to finish at $22.15/cwt., but managed to pick up 17¢ week over week. The 2H 2014 pack closed at $19.48/cwt., down 1¢ week over week.
Friday’s spot cheese action seemed more about the spread between blocks and barrels than about cheese supply and demand overall, but we see it as foreshadowing of what’s to come in the next 1-3 weeks.
Has the market fallen off the edge of the cliff? The trade sure has that feel to it, but will require subsequent follow-through price weakness to validate a reversal of trend. The fundamental dynamics might be there to justify it. From a domestic standpoint, upticks in production out West and the onset of Midwestern flush is increasing the flow of milk. Granted, it may not be the “wall” of milk many expected, but it’s flowing nonetheless.
From an international perspective, the U.S. has become less competitive on price, as European production has increased and international prices have softened. The latest GDT auction results showed a whopping 8.9% decline in prices, with major buyers noticeably absent for a second consecutive week. This is an “adult-swim-only” market. If downside price risk is a concern, strategies should be implemented to mitigate the possibility of continued selling pressure.
Class IV futures finished unchanged to lower on Friday, as the market continues to look for price direction amidst weakening NFDM and butter prices on the spot market.
The market has a bearish tone to it, with volume on the quieter side and a steady weakening in prices. These traits are indicative of markets that are about ready to “turn over”. Bear in mind that Class IV led the way to the upside and will most likely lead the way back down. Granted, there are long-term bullish fundamentals in this market, but that doesn’t make it exempt from temporary price corrections.
April 4 spot session results:
Block cheese: $2.35 (down 7.25¢)
Barrel cheese: $2.2250 (down 0.5¢)
Grade A NFDM: $1.9975 (unchanged)
Butter: $1.97 (unchanged)
• Class III to open lower