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

Class III continued to edge higher yesterday, with the bulk of the day’s strength this time relegated to the second-half contracts. The July through December contracts caught up slightly, with the front half of 2011 finishing up 28 cents per hundredweight on the day with what appeared to be commercial hedgers leading the buy interest. The Class III discount to cheese — particularly in the latter months — has buyers on edge. 

But as many traders looked to the CME spot market for direction Monday, it was the over-bought technical nature of Class III and a lower trade on dry whey futures that took some of the shine off of nearby Class III contracts. Our lead month of March finished down five cents. Look for a steady-to-lower opening this morning. 

Dairy farmers have done a good job of selling and/or buying put options into this contra-seasonal rally. But with $20 per hundredweight Class IV on the board, a rising CME spot cheese market, nearly continual bids in the NFDM market and the drumbeat of higher feed prices, producer selling has slowed some this week. We would advise those producers who do not have any Class III/IV coverage to make sure to space out sales at current prices. 

While mid-year Class IV futures continue to trade steady to slightly higher nearly every day, CME spot butter slid lower yesterday. There has been no spot butter bid so far this week and if they don’t step in soon, we can expect more weakness on butter yet to come (perhaps regardless of fundamentals). Butter futures were mostly steady to slightly lower, as they are already pricing a marked discount to spot. Look for a mixed opening for cash-settled butter futures today.

Grains did an about-face yesterday and traded lower on a lack of fresh news and a slightly stronger U.S. dollar. We look for a little bounce this morning, followed by more selling by the end of the day. Chinese inflation was weaker than expect at 4.9 percent versus an expectation of 5.4 percent. While Chinese officials are behind the curve on fighting inflation, the bark of continued inflation may prove to be worse than the bite. Look for Chinese demand to move south of the equator, with Brazil’s harvest well under way. 

Things are largely quiet this morning as President Obama gets ready to unveil the proposed $3.73 trillion budget at 11 a.m. this morning. 

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011030.pdf


2/14  Class III Futures:   Volume:  2,012 Open Interest (OI) Change:  +603  Total OI:  38,109
2/14 Class III Options:  Est. Put Volume: 873 Total OI:  35,176  Est. Call Volume:  964  Total OI:  26,527
2/14  Spot Markets:   Block Cheese $1.9350 (UP 2 , 2 Trades); Barrel Cheese $1.9000 (UNCH, 0 Trade)
Butter $2.0750 (DOWN 12 1/2, 0 Trades); NFDM: A $1.7950 (UP 1 3/4, 1 Trade), X $1.7750 (UP 1, 1 Trade1)
2/14 Other Dairy Futures Volume:   Butter:  55  Dry Whey:  135  NFDM:  25   Class IV:  71  Cheese: 55  International SMP:  0 

2/14 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.96                 DOWN 3               Vol:   22                OI Change:     UP 108
Mar 11    $18.73                DOWN 5               Vol:   268            OI Change:     UP 104
Apr 11     $18.67                UP 4                       Vol:   523              OI Change:     UP 49
May 11   $18.30                 UP 6                       Vol:   346             OI Change:     UP 76      
FEB-June 2011 Avg:     $18.11             UP 0.04/cwt
July-Dec 2011 Avg:      $17.13              UP 0.28/cwt
FEB-Dec 2011 Avg:       $17.58               UP 0.17/cwt

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