Block cheese up 2 cents on the CME
Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O’Neill in Chicago, Ill.
The Class III market ended the year with 21,108 contracts of open interest. This is a significant drop-off from a year earlier when we had 35,861 contracts of OI.
People hedge less when there is less volatility and/or less opportunity. Dairy farmers would very well likely tell you that there isn’t and hasn’t been much if any profit opportunity in deferred months for the bulk of 2012; at the same time, buyers felt that prices were too high in deferreds when compared to spot pricing and thus they were light at buying futures contracts too far out.
Let’s take a look at pure volume in Class III: we traded 293,717 contracts total in 2012 vs. 368,614 in 2011 ― a clear drop off here, too.
If the above is concerning to you, it should be if you want to see these dairy markets grow. So what are the possible reasons? We didn’t see volatility drop off, so what else? Well, farmers on the West coast didn’t have credit lines like they used to, so we lost some of that market sell side. Opportunities as noted above were deemed less-than-ideal by both sides of the market. But there has to be more. New regulations in the form of the Dodd-Frank bill likely removed some activity. Concerns over the farm bill and potential Dairy Security Act caused uncertainty around the validity of CME hedges and likely caused some drop-off. The fiscal cliff and dairy cliff concerns likely contributed toward the end of the year. If you put all these reasons together, you seem to have a case of a “one off”, an event that happens once before reverting back to the preceding trend ― in this case, a trend of growth. Keep your eyes peeled, but expect 2013 to start with a bang as DF seems much more clearly understood, the dairy cliff and fiscal cliff are dodged, and the Dairy Security Act is shelved for the time-being. If any one issue will still nag at volume and OI, it’s the farm bill and Dairy Security Act because it has just been pushed off in to the future, leaving that concern out there for 2014 hedges and beyond.
The Class III futures markets saw some price premium pulled out of the market on the last day of the year. With the “fiscal cliff” looking to be averted before the dairy markets closed, the writing was on the wall that the “dairy cliff” too would be averted. On this news, we expect some more pressure to start the year on Class III and cheese pricing. On Dec. 31, a two-cent increase in block prices wasn’t enough to stimulate and futures price increases, and we expect that to remain the nature of the market unless cheese surprises us and gets over $1.80 soon; we see it down the road, we are more bullish 2013 than not, we just don’t see it this month.