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

Class III futures traded a lighter, 1,600-contract volume in a mostly mixed fashion Wednesday. Nearby contracts moved slightly lower, and some firming occurred for the second half of 2011 contract months. But when the dust settled, the February to December futures price average finished unchanged at $17.20 per hundredweight. With the largely lackluster trade, one would be surprised to note that both the CME spot block and barrel prices rose again to finish at $1.90 and $1.8325, respectively. A clear divergence of direction between the cash cheese market and futures is now occurring and that divergence, we believe, further supports the idea of an imminent futures price correction.

Most of the time, across a range of commodities, the futures markets will lead the cash market. The same is true in the wide world of milk futures and spot cheese pricing.  But, as you might expect, when dealing in dairy there are always exceptions. And during our tenure in the dairy industry, we have seen the opposite situation develop — one in which the spot market actually appears to be leading futures. 

So, while it is possible for the futures to firm up in respect to higher cheese prices, we don’t expect that type of trade to develop here and now. The recent Class III futures trade looks more like a subtle anticipation of more cheese shaking loose at these levels. Look for a mixed to lower open on Class III this morning.

Butter was quiet again at $2.10 yesterday, and we should still be expecting a move from $2.10 here shortly, but ambivalence in butter did not stop Class IV.  Class IV traded higher yesterday with the April through July contracts leading the charge higher. All four contract months hit $20 per hundredweight, but it was only the June contract that settled there.  Interestingly, the February to December and March to December Class IV packs were trading unchanged to 15 cents per hundredweight lower, while individual contracts in Q2 and Q3 traded 20 cents to 40 cents per hundredweight higher. Class IV producers are taking advantage of these higher prices, and we look for more of a mixed trade here this morning.

Spot NFDM buyers were back at it again yesterday after a brief two-day reprieve from their bidding. Grade A finished up 2 cents to $1.74, and futures followed trading steady to 2 ½ cents higher. Look for a steady opening this morning.

Grains traded sharply higher yesterday on the USDA monthly WASDE report released Wednesday morning. The report surprise: U.S. corn carryover was reduced from 745 million bushels last month to 675 million this month, with 70 million bushels increased industrial consumption. For the first time in more than two years, corn eclipsed the $7 per bushel level on both May and July. It gets tricky to know how much higher buying fuel will push prices — they are slightly lower overnight on U.S. dollar strength. If you own corn, it is time to look at buying puts to protect the downside.

Export sales for corn were much stronger than expected this morning, while soybeans and wheat were largely in line with expectations. Look for a mixed opening on the grains this morning.


2/9  Class III Futures:   Volume:  1,667 Open Interest (OI) Change:  +286  Total OI:  36,881
2/9 Class III Options:  Est. Put Volume: 1,768 Total OI:  32,011  Est. Call Volume:  431  Total OI:  25,454
2/9  Spot Markets:   Block Cheese $1.9000 (UP 3 , 1 Trade); Barrel Cheese $1.8200 (UP 3, 1 Trade)
Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.7200 (UNCH, 0 Trade), X $1.6900 (UNCH, 0 Trades)
2/9 Other Dairy Futures Volume:   Butter:  86  Dry Whey:  41  NFDM:  67   Class IV:  259  Cheese: 211  International SMP:  0 

2/9 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.69                 DOWN 1               Vol:   155               OI Change:     DOWN 18
Mar 11     $18.55                 DOWN 6               Vol:   594               OI Change:     DOWN 2
Apr 11     $18.42                 DOWN 5                Vol:   258              OI Change:     UP 56
May 11    $18.03                 DOWN 5                Vol:   151              OI Change:     UP 88       
FEB-June 2011                   Avg:     $17.81               DOWN 0.05/cwt
July-Dec 2011                    Avg:      $16.69               UP 0.03/cwt
FEB-Dec 2011                    Avg:       $17.20              UNCH

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