Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III prices couldn’t stand up in front of another unchanged cheese spot session — you’ve got to feed the bull to keep him alive; he hasn’t eaten in a while now. We have built in a substantial discount in Class III futures relative to where spot products are pricing milk — over two dollars in some instances. Market talk and trade action suggests that we will test the $1.80’s for spot cheeses, where many believe we will see a first wave of buy side support, but ultimately one that is unlikely to hold and will be followed into the $1.60’s.
Producers have had some opportunities and need to be proactive now if they have not already been.
The slightly over 1,300 Class III contracts we traded yesterday saw declines as steep as 35 cents in August. We suspect it will take a substantial decline in spot cheese to get futures falling much more. We could even bounce upward on futures prices if the spot decline is only small. The break is almost too aggressively priced in right now.
Cheese futures traded 33 times, another decent volume day as they are starting to pick up some traction again. Buyers are happy to pick up contract here on the slope downward in price because it poses less basis risk and means they don’t have to worry about the whey component of the Class III cheese hedge.
The corn market is dangerous right now. December corn has had a 61-cent trading range so far this week. Some speculated of the weakness yesterday that algorithmic traders had a blow-up and we traded limit down. Fundamentally, everybody knows the big picture of tight supplies, record demand and uncertain U.S. acreage and production, so what changed this week? Improving crop conditions in the U.S. and increasing production estimates from the former Soviet Union countries and Europe have trumped production worries.
We look for corn to open 10 to 16 cents higher; soybeans to open 7 to 11 higher.
Daily CME spot market prices:
Block cheese: $2.13 (unchanged)
Barrel cheese: $2.0675 (unchanged)
Butter: $2.08 (down 0.5 cent)
Grade A NFDM: $1.635 (down 0.25 cent)
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