Cheese puts pressure on Class III

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

Heavy selling put pressure on the Class III complex after the Chicago Mercantile Exchange spot block price declined by 0.75 cents to $2.0125, the first lower close for the block price since Jan. 19. The already discounted Class III futures prices has been a reluctant follower of CME spot cheese over the past few weeks. Perhaps; but my thought is that the default position should largely be that the futures market leads cash. If you want a glance at what the CME spot market is capable of, look first at the futures markets.

The correction that began two weeks ago is still underway for now, and we expect it to get worse for Class III before it is over. For today, expect a choppy trade for second-quarter Class III here as the reality remains that nearby futures prices are sharply discounted to CME spot. If we’re only slight lower again after today’s CME spot session, traders may recoil from their shoot-first selling. Producers who are looking for additional coverage should take advantage of those types of bounces if and when they materialize.   

Overall, the supply/demand conditions portend a bullish dairy complex here in 2011, but demand will ebb and flow and with it prices. The world in general, and China in particular, continue to have dairy needs that are ever-more challenging to meet. A recent article from Bloomberg discusses that demand succinctly.  

Butter remains strong here and while NFDM appears to continue to loosen up some, the dynamics over the past few days has shifted to a more isolationist view of dairy products. The divergence between Class III/dry whey and Class IV/butter is widening and it’s possible for that to continue over the next few weeks. One customer asked when prices would return to a more “normal” structure with Class III above Class IV.  The short answer is that no one knows for sure, so look to the futures market. January 2012 has Class III pricing nearly $1 per hundredweight over Class IV at this time.

The California Weighted Average Price was reported at $1.4150 on 13.557 million pounds for the week ending March 4.

The grain complex has been under assault all week with selling pressure pushing corn and soybean prices below initial technical areas of support. Looking a little closer, Friday’s CFTC Commitment of Traders Report showed that speculative buyers did not add many contracts to their net long grain positions during the week of Feb. 22 to March 1. This is a slight change in pattern and the one truth I will report is that speculators have no loyalty. By and large, speculators like prices going down, just as much as they like it going up. 

Take a look at the pre-report estimates. With tomorrow’s USDA supply/Demand report will come more direction for these largely sideways grain markets. If you own expensive feed, we’d advise buying put options to protect. 

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011045.pdf

3/8  Class III Futures:   Volume:  1,822 Open Interest (OI) Change:  +317  Total OI:  36,823
3/8 Class III Options:  Est. Put Volume: 308 Total OI:  37,698 Est. Call Volume: 482  Total OI:  27,440
3/8  Spot Markets:   Block Cheese $2.0125 (DOWN 3/4, 1 Trade); Barrel Cheese $1.9800 (UNCH, 0 Trades)
Butter $2.1200 (UNCH, 4 Trades); NFDM: A $1.8150 (UNCH, 0 Trade), X $1.8025 (UNCH, 0 Trade)
3/8 Other Dairy Futures Volume:   Butter:  33   Dry Whey:  67  NFDM:  36   Class IV:  54  Cheese: 196  International SMP:  0 

3/8 Individual Class III Futures Prices, Change, Volume & Open Interest
Mar 11    $19.54                 DOWN 7               Vol:   279             OI Change:     UP 100
Apr 11     $17.96                DOWN 44            Vol:   591              OI Change:     UP 52
May 11   $17.08                 DOWN 42            Vol:   345              OI Change:     UP 12
June 11   $16.75                DOWN 19             Vol:   252              OI Change:     UP 35  
March-June 2011 Avg:           $17.83                 DOWN 0.28/cwt
July-Dec 2011 Avg:                   $16.89                 DOWN 0.08/cwt
March-Dec 2011 Avg:              $17.26                 DOWN 0.16/cwt

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.

Source:  FCStone/Downes-O'Neill


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