Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
Slight gains early in the week led to an explosive upward price move for Class III and cheese futures on Thursday. Class III June and July contracts settled 48¢ and 50¢ higher, respectively. Perhaps more interesting was the rally in May Class III, which eradicated the discount to the spot market.
Looking under the Class III hood a little closer reveals that the contract months with the greatest price increase (the nearby months) also saw open interest decline ever so slightly. While this information doesn’t support or negate the rally, it is interesting to note that open interest did not grow by leaps and bounds. In other words, there is likely some new commercial buying in May-July, but we’d suggest that the rally is more indicative of futures discounts correcting with the premium in spot – driven in part by some short-covering action. When this happens, markets are vulnerable to increased volatility – including downward price swings.
Although yesterday’s move could be construed as a short-term bounce, there is some genuine concern surrounding the discounts the Class III and cheese markets have carried. We know we’re the most expensive cheese on the block, but we also hear of tightness of inventory, good forward sales and a stunted Upper Midwest milk production flush. All of these things are underpinning futures through Q4.
NFDM saw another good round of buying Thursday. While futures discounts look attractive to spot, we have to wonder if the short-term technical bounce we’ve seen develop in NFDM is going to be just that – short term. We expect a more mixed NFDM trade to end this week.
April 24 spot session results:
Block cheese: $2.21 (unchanged)
Barrel cheese: $2.1800 (down 3.75¢)
Grade A NFDM: $1.8575 (unchanged)
Butter: $1.8950 (unchanged)
• Class III & Cheese to open firm
• Dry Whey to open steady
• Class IV, Butter & NFDM to open mixed
Grain markets closed mixed yesterday, with corn lower and beans higher. The market has been trading on colder and wetter 14-day forecasts for the past several sessions, and has done a good job of pricing regarding concerns surrounding planting delays. The soybean market is getting a brief technical bounce, perhaps inspired by positive old-crop export sales, but has really focused this week on reports of additional cargoes of Brazilian beans – previously sold to China – being resold to the US. Chinese crushers continue to negotiate with exporters to cancel South American cargoes.