Technical firming in Class III this week reached what may be a crescendo yesterday with prices pushing as much as 0.24/cwt higher in the February and March contracts. Big paper buyers stepped in across the board setting the tone for the day, but it wasn’t until buyers worked through offers on the CME spot market resulting in a penny higher close on both blocks and barrels that buying enthusiasm really spilled into the nearby futures. Volume spiked (over 2,000 contracts) and open interest exploded (up 685) showing that new buyers are indeed a part of the mix, while short-covering has been relatively limited.

Questions and stories took hold on how and why buyers were so aggressive in the CME spot market. There may be several reasons including the obvious possibility that they actually need the product. But it is apparent that buyers find value in the low-$1.30s. They find value relative to other dairy product prices, to international cheese prices and to CME futures; the Q1 Class III futures price average is now $13.64 – nearly $1.00/cwt better that CME spot values. But value is truly in the eye of the beholder and just because someone sees value does not change the fact that as far as we can tell there remains fresh product available today. We look for a steady to firm opening on follow-through buying.

The other dairy contracts had a relatively quiet pre-holiday type trade. Butter futures continue to nudge higher on technical strength. This is the time of year when butter inventories are built and it appears that commercial buyers want to own futures as much as they want to build physical. The surprising CWAP sale had little impact on futures here in Chicago and dry whey was mostly flat. We look for a quiet opening to these markets this morning.

Grains finished mixed Wednesday as weather worries from a dry Argentine corn crop in the tasseling stage as well as technical strength have been supportive all week. The U.S. dollar also succumbed to sell pressure giving a boost to the trade as well. While we have weather concerns globally and a tight balance sheet to boot, we are not interested in chasing corn or soy meal higher this week. The risk/reward from where we sit is not in your favor. Look for a mixed to lower opening in the grain complex this morning.

12/29 Class III Futures: Volume: 2,037 Open Interest (OI) Change: +685 Total OI: 34,082
12/29 Class III Options: Est. Put Volume: 947 Total OI: 25,666 Est. Call Volume: 454 Total OI: 24,118
12/29 Spot Markets: Block Cheese $1.3300 (UP 1, 12 Trade); Barrel Cheese $1.3300 (UP 1, 8 Trade)
Butter $1.6525 (UNCH, 0 Trades); NFDM: A $1.2700 (UNCH, 0 Trades), X $1.2250 (UNCH, 0 Trades)
12/29 Other Dairy Futures Volume: Butter: 48 Dry Whey: 11 NFDM: 6 Class IV: 1 Cheese: 12 International SMP: 0

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.

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