Editor’s note: This market commentary is provided by Dave Kurzawski, risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

Class III futures started off the day firm, but quickly retreated on the heels of a quiet Chicago Mercantile Exchange spot market. No buyers, no sellers, no trades, no inspiration. The April through December Class III contracts have been fighting a loosing battle against technical resistance and baring a lack of impetus from spot, traders are shifting their focus to a continuation of the downward market correction that began two weeks ago. At the end of Monday, however, the market was mostly mixed in a sideways trade.

Monday may have just been a breather for CME cheese prices before further gains. Anecdotal evidence points to both continued strong demand for cheese from the export market, but also a softening for barrel cheese here domestically. Monday’s quiet open and close session may also be foreshadowing of perhaps only short-term precipitous fall in CME cheese values. Only time will tell. But when Class III futures cannot seem to maintain price strength when the net result of the news is bullish (e.g. auction figures, international prices, ending Mexico Tariffs on U.S. products), we should all be looking the other way. 

There is an important distinction here. The market set-up could bring about a shorter-term (30- to 60- day) decline in Class III prices, but the dairy market fundamentals in general are bullish right now and will likely remain that was through 2011. The best bull markets in history have corrections that make you think the run is over. We have not yet had that type of correction in dairy and we shall study it closely to see how it unfolds, if at all. Look for Class III to open mixed this morning.

Producers have no easy job managing profits margins here. With the cost of feed continuing to put the noose on margins, producers are once again faced with backing away from hedging milk.  Recently, however, producers have the green light to make additional sales or buy put option coverage. At the end of the day, a good and profitable price is a good and profitable price. Call to discuss.

CME butter futures continue to rocket to the upside as futures closed unchanged to higher in every month but November yesterday. Commercial buyers are faced with the same dilemma of being short product at the worst time. Easter comes later this year, but as a customer mentioned yesterday — that only shortens the time between the biggest butter holiday of the year and the ice cream season. We look for spot butter to continue to trade around the $2.10 to $2.15 level today, but futures prices do seem to be slowing some. Look for a mixed open this morning.

CWT accepted bids to sell 0.7 million pounds of cheese to Central America and the Middle East.

Grains stumbled yesterday as tight balance sheets lost out to the potential demand slaughtering reality of higher energy costs. Plus there is no wet weather to stir a weather rally just yet. These grain markets remain ultra-sensitive to news at these levels and although they remain above technical areas of support, the overall technical picture is turning more bearish. 

The current set up on grain futures prices brings us to a quote from Justin Mamis. Mamis, who is often touted as one of the most respected authors, philosophers, market pundits, and investment advisers of all time, said this of bull markets, “And then, in the end, as the curtain comes down on the bull market you realize that the one rule about tops is not that they provide this or that signal, but that they come before anyone is ready.”  He wrote that in 1987.   

Expect a choppy two-sided trade going into Thursday’s supply/demand report. Look for corn to open 4 to 6 lower and soybeans to open 8 to 12 lower. If you own corn or soybean meal for feed at elevated levels, you may want to consider owning put options to protect the downside. 

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011044.pdf

3/7  Class III Futures:   Volume:  1,492 Open Interest (OI) Change:  -4136  Total OI:  36,506
3/7 Class III Options:  Est. Put Volume: 753 Total OI:  37,143 Est. Call Volume: 324  Total OI:  27,404
3/7  Spot Markets:   Block Cheese $2.0200 (UNCH, 0 Trades); Barrel Cheese $1.9800 (UNCH, 0 Trades)
Butter $2.1200 (UP 1/4, 8 Trades); NFDM: A $1.8150 (UNCH, 0 Trade), X $1.8025 (UNCH, 0 Trade)
3/7 Other Dairy Futures Volume:   Butter:  45   Dry Whey:  14  NFDM:  7   Class IV:  20  Cheese: 13  International SMP:  0 

3/7 Individual Class III Futures Prices, Change, Volume & Open Interest
Mar 11    $19.61                 UP 3                       Vol:   273             OI Change:     UP 34
Apr 11     $18.40                DOWN 3               Vol:   448             OI Change:     UP 177
May 11   $17.50                 DOWN 6               Vol:   218              OI Change:     UP 30
June 11   $16.94                DOWN 8               Vol:   256              OI Change:     UP 93  
March-June 2011 Avg:           $18.11                  DOWN 0.04/cwt
July-Dec 2011 Avg:                   $16.97                 UP 0.03/cwt
March-Dec 2011 Avg:              $17.42                 UNCH/cwt

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Source:  FCStone/Downes-O'Neill