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

Congratulations Green Bay Packers and their loyal fans! While I’m still a Bear fan, job well done. 

The first week of February found the Class III market closing with a whimper. After Monday’s futures price stab to the upside, market participants dusted themselves off and futures prices chopped largely sideways for the balance of the week. There was another round of rising gDT auction price results, another round of higher USDA international prices and a technically strong market to boot, but little further advance of futures prices. The Chicago Mercantile Exchange spot block/barrel market also pushed higher still closing the week up 7.5 cents at $1.81 for block cheese and up 7 cents to $1.7750 for barrels. Look for a mixed open to start this week.

Could this sideways trade be a brief reprieve before another futures price breakout to the upside? In a word, yes. But as this commentary has said over the past week, a correction to this skyward move is expected. This is not to say that the market fundamentals that pushed Class IV and dry whey to these lofty levels do not have merit. It is not to say that $1.80 plus cheese does not have merit. It is just to say that a corrective futures trade may still be imminent.

The CME spot butter market has sat quietly on its perch almost overlooking the rest of the dairy trade for the past four weeks.  The question we should be asking ourselves is has the price of butter been waiting for everything else to catch up before moving higher still or is the price of butter going to trade lower on its next move? 

If you just look at the world prices and stocks, you’d expect more firming price.  But the cash-settled butter futures, while firming and backward-dated and bullish in structure, just cannot seem to trade higher than the CME spot butter market — they continue to trade at a discount.  This butter futures discount to spot may end up being a precursor to butter price weakness by the end of the month. Regardless, the one aspect we feel most confident about right now concerning butter is that a move from $2.10 is highly likely in the very short-term. Look for a mixed open on butter futures this morning.

NFDM and Dry Whey remain tight here as we enter the first full week of February. We have not seen much change their and expect there to be a firm bid for both products throughout the week.  It is important to note that Friday marked the first day of silence during the NFDM cash call in weeks. This is not to say that buyers are going to drop their bids, but that perhaps the NFDM market has reached a plateau for the time being. We look for a mixed opening to the NFDM and dry whey futures markets this morning.

On Friday, the U.S. Labor Department reported that 36,000 payroll jobs were created in January well below the 135,000 figure expected. But the unemployment rate fell to 9 percent as people quit looking or couldn’t look because of the weather or something. The talking-heads have spent hours arguing what the numbers mean; probably very little at this point. 

The grain complex finished higher on Friday. We figure that the South American crop completed its weather scare when the drought ended in Argentina. Prices are still adjusting to those crop sizes but should be done soon. That leaves the acreage battle left to fight in the U.S., the U.S. planting season, and possible U.S. summer growing problems as reasons for additional price rallies. None of these are imminent this morning. What is imminent is that the technical indicators remain strong with a new high close on Friday. We look for a higher opening this morning, but a firm U/S. dollar may provide some selling pressure throughout the day. 

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011024.pdf


2/4  Class III Futures:   Volume:  1,642 Open Interest (OI) Change:  +15  Total OI:  40,775
2/4 Class III Options:  Est. Put Volume: 1,276 Total OI:  30,343  Est. Call Volume:  1,282  Total OI:  25,015
2/4  Spot Markets:   Block Cheese $1.8100 (UP 2 1/4, 0 Trades); Barrel Cheese $1.7750 (UP 2, 0 Trades)
Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.7200 (UNCH, 0 Trade), X $1.6900 (UNCH, 0 Trades)
2/4  Other Dairy Futures Volume:   Butter:  15  Dry Whey:  38   NFDM:  8  Class IV:  106  Cheese: 17  International SMP:  0 

2/4 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.59                 DOWN 4               Vol:   308             OI Change:     DOWN 37
Mar 11    $18.50                UP 13                     Vol:   519              OI Change:     UP 159
Apr 11     $18.15                UP 7                       Vol:   315              OI Change:     UP 67
May 11   $17.83                 UP 12                    Vol:   215              OI Change:     UP 26       
FEB-June 2011 Avg:     $17.63             UP 0.07/cwt
July-Dec 2011 Avg:      $16.60              UNCH
FEB-Dec 2011 Avg:       $17.07              UP 0.03/cwt

These data and 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