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

Class III futures lost sizable ground yesterday on aggressive selling and a spike in trading volume. In all, 3,279 contracts traded hands as Class III lost its higher early footing after the CME spot block market fell ½ cent to $1.9400 — the first lower close for barrel cheese since Jan. 19. Weaker Class IV, NFDM and butter markets didn’t help rectify the situation, and by day’s end Class III’s finished largely lower (0.02/cwt to 0.54/cwt March thru September). Look for a slight recovery bounce this morning as the trade was steady to slightly firm overnight.

We have been asked by readers and customers alike if this was the finale to the correction mentioned in this commentary for the past few weeks. Although it appears futures prices have found some level of technical support here yesterday, we expect further weakness in spot cheese prices over the next week or two as sources have turned from panicked to more calm and an extra load or two of fresh cheese appears to be shaking loose. If spot cheese weakness materializes, then we can look ahead to another wave of selling on Class III. It may be a few days off, however.

From a fundamental standpoint, confusion of market prices and sentiment reigns. One customer and friend said it best yesterday: “If I look at seasonal historical prices, we should be at a $1.30 cheese market.  If I look at export, we should be at $1.75. And if I look at Class IV, we should be at $2.30 or better.”  Couldn’t have said it better ourselves.

Another big reason for Class III selling is perhaps the turning tide here on Class IV, NFDM and butter futures. Weakness spread through all three markets yesterday on moderate to heavy volume. In all, 340 NFDM futures traded hands from steady to 2 cents per pound lower. While it’s difficult to pinpoint exactly the change in sentiment for these markets, we think the printing of $100/barrel crude oil stunting economic growth has merit. The supply is tight, but it’s the demand under watch right now.   

On the economic flip side, it was reported that U.S. existing home sales rose 2.7 percent to a 5.36 million unit (annualized) rate from December. The National Association of Realtors noted that is the first year-on-year increase in home sales in seven months.

Fundamental grain traders will have their focus on the discussions today from the USDA Outlook Forum. The USDA is looking for a 2011/12 corn yield of 164.7 bushels/acre and 2011/12 ending stocks at a still tight 865M bushels. Corn and soybeans were slightly lower overnight and we look for a weaker trade early. While we suspect that a significant top has now been put in the grain markets, another stab at the upside here today is possible.    

2/23  Class III Futures:   Volume:  3,279 Open Interest (OI) Change:  +180  Total OI:  40,018
2/23 Class III Options:  Est. Put Volume: 778 Total OI:  38,527  Est. Call Volume:  393  Total OI:  27,265
2/23  Spot Markets:   Block Cheese $1.9850 (UP 1/4, 1 Trades); Barrel Cheese $1.9400 (DOWN 1/2, 2 Trades)
Butter $2.0050 (UNCH, 0 Trade); NFDM: A $1.8300 (UNCH, 0 Trade), X $1.8025 (UNCH, 0 Trade)
2/23 Other Dairy Futures Volume:   Butter:  62   Dry Whey:  27  NFDM:  340   Class IV:  151  Cheese: 7  International SMP:  0 

2/23 Individual Class III Futures Prices, Change, Volume & Open Interest

Feb 11     $17.04                 UP 6                       Vol:   105              OI Change:     UP 45
Mar 11    $18.75                 DOWN 2               Vol:   575              OI Change:     UP 64
Apr 11     $17.61                DOWN 54             Vol:   749             OI Change:     UP 29
May 11   $17.49                 DOWN 40            Vol:   366             OI Change:     DOWN 8    
FEB-June 2011 Avg:     $17.59             DOWN 0.25/cwt
July-Dec 2011 Avg:      $16.94              DOWN 0.08/cwt
FEB-Dec 2011 Avg:       $17.24              DOWN 0.15/cwt

These data and these 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