Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III started off Thursday morning quietly, with prices mixed but mostly weaker in the front months and stronger farther out. The spot market saw blocks remain unchanged at $1.7900 on 0 trades, 0 bids and two offers, while barrels slipped ½ cent to 1.7200 on thre trades, one bid and one offer. The barrels closed well off their lows however which supported class III prices as they dipped as low as 1.7050 before recovering to the 1.72 closing price.
After turning higher shortly after the spot market class III seemed to feel some impact of the spot butter price falling and future ended up mixed, with prices in October and November down 7 to 11 cents, while December 2012 through November 2012 was mostly steady to a nickel higher. Volume was moderate with a little under 800 contracts traded. Given the soft demand for class IV products we would expect to see more milk makes its way into the class III market and that will likely allow the spot market to slide into the 1.60’s as we still feel blocks will fall to barrels in order to correct the spread back into the historical range of 3 to 5 cents.
Cheese futures prices were 1.3 to 2.3 cents lower through January, while 2012 was steady to ½ cent higher. Volume was decent with 15 contracts traded.
Class IV futures saw 1 trade in October where prices were down a dime. Volume continues to be very lackluster here but we would expect that to pick up in the near future along with volume in both butter and NFDM as though class III seems to have strong commercial hedge interest class IV seems to very much be lacking to this point. Options markets are being made here as well and we would be happy to discuss some of the currently working strategies for the fourth quarter and 2012 months as they may be of interest.
We look for milk to open mixed to firm.
Meanwhile, the spot butter market continued to decline today falling by 5 cents to 1.9450 and a lone bid entered the market at 1.90. Futures continued to react in kind, falling 1 to 2.5 cents from October 11 through March 12 on moderate volume of 31 total trades. With stocks tight early in the year and prices high it seems buyers were not willing to wait to see what would happen during the holiday season and instead appear to have gotten out front of the concern and built inventories to hold for that time of year. We have already started a counter seasonal break and we expect that to continue, though we look for some remaining buy interest in the mid $1.90’s.