Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
It was an old-fashioned schoolyard beating that Class III and cheese futures took. On heavy volume, well over 2k Class III contracts and over 300 cash-settled cheese futures, prices fell off a cliff.
Sentiment at the International Dairy Foods Association conference was more bearish than anything, and we believe people took that sentiment to the board. We heard of fewer product deals being negotiated than normal here and that probably left product unsecured that needed pricing.
Dry whey futures, which have held up Class III for a while now, finally began to break. There was a strong rumor permeating the conference that a facility had a large amount of whey to put onto the market and that it could or would lower prices. Is it true? We’ve no way of knowing, but perception is often reality and we believe people let their money follow this perception.
While Class III futures might well bounce after a price massacre over the last weeks’ worth of trading, that bounce would likely just be a selling opportunity. With the premium of Class III over futures gone, trading firms have no incentive to buy spot since they can’t sell futures to lock in a profit as had been the trade of choice for nearly a month thereby having provided some short term stability to spot pricing.
The Class III and cheese futures have steadily continued forming a strong cost of carry pricing model, and that will likely continue for a lot longer. The bear spreads have worked and should continue working. We do more of what works and less of what does not. We will add to bear spreads on a rally. We will buy NFDM and sell dry whey, we will stay clear of Class IV and use bear spreads in butter as well.
In the grains, Turnaround Tuesday was sparked by better South American rains in the forecast coming up. Corn dipped double digits falling 10.5 cents back below $6 to 593.50 with little between that level and the previous lows near $5.75. The wheat market followed along down double digits but soybeans held closing unchanged. Without the influence of large movement in the outside markets. or changes in the South American forecast, it seems the grains would be relatively quiet and perhaps ready to focus on the soy/corn relationship ahead of spring planting intentions. We expect to see corn continue to dip toward the previous lows and will be watching the macro markets and currency changes for a potential sign we can break below that price.