Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
Last week will be remembered for the resounding strength of a screaming butter market, as well as solid gains from spot cheese, which finished the week north of the $2.20/lb. mark for both blocks and barrels. Although Class III futures experienced some profit-taking and diverged from cash trade, it was not before significant gains.
It marked the fifth consecutive week of higher highs and higher lows. From a fundamental perspective, we are hearing cheese production out West is holding steady, but is lacking in other areas of the country. Barrel tightness in the Midwest is contributing to the firm undertones that have triggered recent price spikes.
Based on Friday’s settling spot market, September’s Class III milk price would be $23.30/cwt., up from $22.18/cwt. the previous week. With strong advances in the nearby contracts, deferred months have reluctantly tagged along, and by weeks’ end the 4Q 2014 pack average had picked up 18¢, settling at $19.99/cwt.
Cheese futures have largely traded in sympathy with Class III price movement over the past few sessions, and will have a firm bid under them as long as the spot market continues on its current trajectory.
Dry whey futures continue to trade range bound, with hedge interest at times extending well out into 2015. The market tone is mixed, as are inventory levels. The market is weighing whether slipping international prices will pressure the market lower, or whether lackluster production levels that have pinched the whey stream are enough to counterbalance.
Class IV futures continue to sort out conflicting price signals. Fear, greed and panic all culminated to propel the spot butter market 26¢ higher on the week, to its fourth highest level in history. Aggressive upside inertia has yet to be quelled, and while initially the futures market was hesitant to tail the move, it was left with little choice as the cash market kept climbing, which inevitably triggered lock-limit moves higher. Tight inventory levels and lower churn rates have underpinned the market, as buyers scramble to get ahead of the ensuing demand season.
NFDM futures continued to falter in lock-step fashion with an eroding spot market, which shed 14.5¢ over the course of the week, settling at $1.3975/lb. The market has come under heavy selling pressure as international prices continue to slip and buyers are reluctant to step out and make purchases at these levels. The trade will be closely eyeing this week’s Global Dairy Trade (GDT) auction for further indications on market sentiment.
If butter flails here and the next Global Dairy Trade (GDT) auction continues its trend lower, Class IV could find itself with considerable downside risk. Spot markets provide a Class IV price of $23.72/cwt., up 80¢ from last week.
August 15 spot session results:
Block cheese: $2.2200 (up 3.0¢)
Barrel cheese: $2.2100 (up 1.5¢)
Grade A NFDM: $1.3975 (down 2.25¢)
Butter: $2.6600 (unchanged)
• Class III to open sharply higher
• Cheese to open higher
• Dry Whey to open mixed
• Class IV to open steady
• Butter to open slightly lower
• NFDM to open steady
Grain markets continue to digest latest USDA numbers, resuming choppy trade as we head deeper into the growing season. All things considered, it’s been a rather smooth ride from planting to the present, but the recent cool Midwestern mornings have begun to spin chatter of an early frost. Talk about a market starved for a story… it’s the middle of August. The corn market is trying to round out a bottom, finishing the week with its fifth consecutive close in the green. The soybean market continues to exhibit firm undertones in nearby contracts, with deferred months chopping in sideways trade.
• Grains to open mixed but mostly higher
The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Any reference to past performance is not indicative of future results. All references to futures/options trading are made solely on behalf of FCStone, LLC. All references to swap execution and bi-lateral swaps are made solely on behalf of INTL Hanley, LLC. FCStone, LLC will clear swaps when applicable. Swaps are only available to eligible counterparties. All observations of economic, political and/or market conditions are not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. and its subsidiaries and should be construed as market commentary. All recommendations to buy or sell a specific derivative or forecasting statements regarding market activity and the pricing thereof should be construed as a solicitation in any jurisdiction in where such an offer or solicitation would be legal. Proper context and guidance including but not limited to the particular trading objectives, financial situations and the needs of the intended audience were taken into consideration when this recommendation was prepared. Contact your account representative for specific advice to meet your specific trading preferences or goals. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. and its subsidiaries. Sources of information believed to reliable were used in preparing such observations, and no guarantee or representation regarding the accuracy of those sources has been made. INTL FCStone Inc. and its subsidiaries are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material.