Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O’Neill O'Neill in Chicago, Ill.
Class III futures opened the week with strong activity, trading mostly lower on the day. Spillover pressure from the soft grain markets, along with another sharp drop on spot block cheese prices, drove price direction. Over 1,700 trades took place on the day, as nearby months continued to lead the declines.
From Dec through June, prices were 12 to 29 cents lower as the Jan-June pack closed down 20 cents on the day at $18.60. Interestingly, it did seem for a period of time that the declines may be worse than they were, as the spot activity seemed to give the market a sense of support with the drop in blocks really serving to close the block-barrel spread but necessarily indicative of further price weakness in the short term. The market has traded to the point of parity between spot and futures, and now futures are saying “prove it” to the spot session rather than pricing in further declines. Indications we’ve gotten in speaking with market participants indicate still firm demand in the short term, which seems likely to support spot pricing at its current levels for the time being. But there is still much worry about deferred demand, as all the demand is for current needs while there is little indication of buying for 2013 needs. The spot price pressure seems to be coming as cheese processors and end-users are reluctant to store cheese at the previously elevated levels with the uncertainty of that future demand for product. We do expect that spot will find support in the coming sessions, as we’ve had very few participants tell us they expect to see cheese $1.70’s ― and we’re nearly there.
Follow-though selling from Friday morning’s USDA report sent the grain markets sharply lower to open the week.
Soybeans led the declines early, as South American weather looks to be taking a positive turn with forecasts of rain for the dry northern regions of Brazil and dryness in Argentina to allow for planting to resume. Corn finished the day down 20.75 cents in December at 718; soybeans off 46.25 cents in January at 1405, and wheat down 28.75 in Dec at 857.75. It’s very difficult to say how much further prices could decline, but from a fundamental standpoint the market still needs to ration demand and it remains to be seen if that can happen given the price declines. We prefer to look toward call options for protection currently against higher prices, as news will be light through the end of the year outside of South American weather, and funds still hold a sizeable long position, which could trigger the market to “over do it” to the downside.