Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
While Class III futures got a slight boost in trading activity yesterday (1,074 contracts), it was really the ability to discern the very short-term price fluctuations that diminished. What began trading higher in the early morning gave way to a softer close after both blocks and barrels lost another 1.25 and 1.50 cents, respectively. Though futures closed mostly lower, with spot prices now solidly under $1.60 lb., traders are left scratching their heads as futures remain largely well-supported at current levels. In fact, it is truly the January contract alone that remains under the most sell pressure. What’s going on here?
We’re in the throes of budget season for many dairy companies. As the spot has fallen to the mid-$1.50’s, commercial buyers are seizing the opportunity to layer in coverage to weakness in Class III for part or all of 2012. The 2012 Class III futures “cheese equivalent” is trading sideways at the $1.65 price level — courtesy of a strong dry whey market — a number that is viewed as a very reasonable budget target coming off $2 prices this past year.
Despite brisk option fence trading (or at least bids and offers), producers are not overwhelmingly thrilled with such a price and sell side pressure is somewhat limited. Even amid bearish outside influences leading to a growing contingent of dairy market bears, do not underestimate the desire by end users to own a price for what is shaping up to be a very uncertain commodity price year: 2012.
We won’t go away without giving you our opinion that, even though cheese remains widely available, spot cheese prices ought to slow their descent at current levels which may prompt a sharp, short-lived futures price spike to finish the week. Eventually, however, we expect that the market will trade into the bid, the buyer’s will be full and prices will push through to new lows as we roll into the New Year.
Weaker world equity markets, a strong U.S. dollar and a blood bath for gold all had a hand in creating a stiff headwind for the grain complex. March corn finished just below a major level of support at $5.85. It may be a head fake, but that would argue with the overall trend that is down. From a technical perspective, the $5.00/bu. train is leaving the station. If you’re buying corn, own puts below.
Conversely, soybean meal appears to be losing steam to the downside. As word gets out about more corn acres being planted, we may have quite a bear bounce on the protein side of the equation. On Tuesday, Oil World estimated the 2011-12 Brazilian soybean crop at 72.8 million tons, down from 74.3 million tons in late November due to drier weather.
Earlier in the week, Morgan Stanley cut their grain price forecasts. They cut 2011-12 corn down from $7.25 to $6.60. They lowered soybeans from $14.25 to $12.75, and 2011-12 wheat down from $7.50 to $6.70. We think they need to go lower.
We look for corn to open mixed and for beans to open 7 to 10 higher.
Daily CME spot market prices:
Block cheese: $1.5875 (down 1.25 cent)
Barrel cheese $1.54 (down 1.5 cent)
Butter: $1.59 (down 2 cents)
Grade A NFDM: $1.45 (unchanged)
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