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

Happy Valentine’s Day!

Friday morning, the USDA/FAS released its export data for the month of December, and we now have another piece of the puzzle that flipped Class III prices nearly overnight in January. U.S. cheese exports were a whopping 19,989 metric tons in December, up 63 percent from December 2009. It appears that export figures for butterfat and whey were more in line with usual exports. Nevertheless, while domestic phones were silent, it is quite clear that the rest of the world was buying in December. We’ve had the market move and now we get the news.

Still trading at a discount to the CME spot cheese market, Class III futures traded firm Friday to finish out the week on a strong note. Stronger dry whey futures prices Friday helped push Class higher to close the widened cash-futures spread. Producers’ selling was light, while commercial buy orders picked up some steam at week’s end. Class III is firm overnight Sunday on spill-over buying from Friday. We look for a 0.10/cwt to 0.20/cwt higher opening this morning.

From all we can tell, fresh cheese that can be brought to the exchange remained tight again last week.  Coinciding with cheese tightness, we began hearing several stories of a worsening milk supply situation in the Midwest -– not where it was expected in California. On the flip side, we also hear that aged cheddar is trading at a sharp discount to CME spot prices currently. Because of this, we still expect some fresh cheese to shake loose and come to exchange in the next week or two.

Speaking of shaking loose, The CME spot butter price dropped from grace. For the first time since Jan. 6, the spot butter closed below $2.10 and there was product offered. Maybe this is just a one-off. But if you were nervous about building inventories at $2.10, Friday’s break of price silence doesn’t make you feel any better. Butter stocks are still well below 2009 levels, but the anecdotal news we mentioned last week about deals being done at $2.00 or lower appear to jive with the direction of CME spot butter on Friday. Look for a mixed open on butter futures.

The dry whey market was strong again on Friday, but is set to open this week on a more mixed tone as well. 

While the January USDA Milk Production Report is scheduled for a Friday afternoon release (2 p.m. central), the big report out for many traders this week will be China’s inflation data released tomorrow. Expectations are that the rate of Chinese inflation is 5.4 percent, up from 4.6 percent, but some suspect it is greater than that. The weaker Yuan is counter-acting Chinese attempts to stem the tide of widespread inflation with interest rate increases. I don’t know which will win out in the end, but I think the world’s unrest in general -– and China’s Econ 101 lesson -– will make the U.S. dollar look like a well-managed currency. 

Grains are called to open mixed this morning after pushing new highs on Friday. 


2/11  Class III Futures:   Volume:  2,003 Open Interest (OI) Change:  +371  Total OI:  37,506
2/11 Class III Options:  Est. Put Volume: 1,768 Total OI:  32,011  Est. Call Volume:  431  Total OI:  25,454
2/11  Spot Markets:   Block Cheese $1.9150 (UP 1/4 , 0 Trades); Barrel Cheese $1.9000 (UNCH, 0 Trade)
Butter $2.0900 (DOWN 1, 0 Trades); NFDM: A $1.7775 (UP 1/2, 3 Trades), X $1.7650 (UP 1/2, 0 Trades)
2/11 Other Dairy Futures Volume:   Butter:  61  Dry Whey:  42  NFDM:  37   Class IV:  282  Cheese: 141  International SMP:  0 

2/11 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.99                 UP 29                    Vol:   279              OI Change:     DOWN 182
Mar 11    $18.78                UP 22                    Vol:   312              OI Change:     UP 121
Apr 11     $18.63                UP 29                    Vol:   381              OI Change:     UP 101
May 11   $18.24                 UP 29                    Vol:   179              OI Change:     UP 40      
FEB-June 2011 Avg:     $18.07             UP 0.28/cwt
July-Dec 2011 Avg:      $16.85              UP 0.17/cwt
FEB-Dec 2011 Avg:       $17.41               UP 0.29/cwt

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Commodity trading involves risks, and you should fully understand those risks before trading.

Source:  FCStone/Downes-O'Neill