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

It was a big price swing for the nearby Class III futures contracts yesterday. April Class III traded as low as $17.60 overnight and into the early morning, but retraced and rallied sharply after a steady Chicago Mercantile Exchange spot cheese trade. The trade decided that the discounts futures have been running were just too much to handle for the current pricing of spot. When the closing bell rang, Class III finished mostly firm in the nearby and more mixed in the deferred contracts. April had a range of $ 0.72 per hundredweight.

Volume perked up during yesterday’s trade, but open interest did not. In fact, open interest was lower in the heavily traded second quarter months. Prices bounced off of short-term technical support levels, but the sentiment for a continued firm trade did not come through in open interest Wednesday. April and May contracts had some follow-through buying last night and that enthusiasm seems to be waning some this morning. Look for a mixed to lower opening on Class III.

While the undercurrent of dairy pricing is still bullish, producers should maintain their thoughts of locking in profit margins on at least a portion of their production. Commercial buyers remain interested in locking in discounted-to-spot forward pricing. However, the risk is that many buyers are willing to buy $1.70-$1.75 equivalent forward prices with $2 spot, but lose that interest at say $1.85 spot. And the cycle kind of perpetuates itself and prices are then subject to fall farther then expected.

The differences between cheese and butter are stark. The butter market continues its strong rally pushing higher well into the third quarter on Wednesday. Continued supply/demand tightness is keeping a firm bid on butter that doesn’t show any signs of slowing right now. Unless we see a dramatic change on the available supply situation for butter, prices should remain elevated through the Easter buying season. Look for a mixed trade early on butter.

The USDA Supply/Demand numbers came and went with little surprise this morning and that will continue to foster what has already been a change of attitude to more bearish by grain traders this week.  Although the USDA did not change its corn used for ethanol production estimate, market participants are concerned about a slower ethanol grind and growing opponents to ethanol subsidies. 

U.S. Senators Tom Coburn, M.D. (R-OK) and Ben Cardin (D-MD) today introduced a bill to save taxpayers $6 billion by repealing the costly and ineffective Volumetric Ethanol Excise Tax Credit (VEETC) or “blenders tax credit,” which provides .45 cents per gallon to blenders of ethanol. Last week, the Government Accountability Office (GAO) released a report describing the tax credit as “largely unneeded today to ensure demand for domestic ethanol production.”

Look for corn to open 5 to 7 cents per bushel lower while soybeans are called to open 12 to 18 cents per bushel lower.


3/9  Class III Futures:   Volume:  2,485  Open Interest (OI) Change:  -23  Total OI:  36,800
3/9 Class III Options:  Est. Put Volume: 353 Total OI:  37,925 Est. Call Volume: 266  Total OI:  27,782
3/9  Spot Markets:   Block Cheese $2.0125 (UNCH, 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)
3/9 Other Dairy Futures Volume:   Butter:  52   Dry Whey:  56  NFDM:  21   Class IV:  91  Cheese: 19  International SMP:  0 

3/9 Individual Class III Futures Prices, Change, Volume & Open Interest
Mar 11    $19.63                UP 9                       Vol:   499             OI Change:     UP 127
Apr 11     $18.25                UP 29                    Vol:   822             OI Change:     DOWN 270
May 11   $17.23                 UP 15                     Vol:   434              OI Change:     DOWN 83
June 11   $16.90                UP 15                     Vol:   148              OI Change:     DOWN 6 
March-June 2011 Avg:           $18.00                 UP 0.017/cwt
July-Dec 2011 Avg:                   $16.90                 DOWN 0.01/cwt
March-Dec 2011 Avg:              $17.34                 UP 0.08/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