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

3,000 Class III contracts traded hands yesterday as volume has skyrocketed along with price this week. After a reprieve Tuesday, buyers were at it again pushing both Class III futures and cheese higher on Wednesday. But with all the activity and phone calls and questions, it was truly only the February to April contracts that traded higher on good volume – the second half of the year continues to trade in a narrow sideways pattern here mid-week. We look for a mixed trade early as Class III futures prices consolidate at a premium to current spot pricing.

What is that premium? Currently March Class III is running about a nickel premium to CME spot prices, so there is some thought at cheese prices will rise higher yet today. On the other hand, however, buyers of both Block and Barrel cheese have only bought 1 load a piece so far this sharply higher week leaving us wondering how much they are truly willing to buy at these levels. In fact, there were no trades during the CME spot dairy markets yesterday.

There has either been a swift tightness on fresh product that prevents any would-be seller from bringing product to Chicago. Or the sellers have been biding their time letting buyers’ trip over themselves in an emotional furry. We hear that there is some real tightness on fresh product as both domestic and international demand is stronger than most anticipated, but would like to see some trading in the CME spot market to get a better handle on the situation.

Meanwhile, it is clear that NFDM and Dry Whey have a firm bid and few if any offers on product in the country. March to July NFDM futures are trading in the mid-$1.50’s while dry whey prices during the same time period are trading well above 50 cents per pound. In our estimation, it has been the dry whey market that has provided the bulk of Class III support over the past week, not necessarily cheese. The question to answer then is: will dry whey prices further diminish the Class III/CME Cheese correlation as we roll into February? We don’t have an answer for that, but based on current supply/demand fundamentals it would seem plausible

Producer selling has picked up over the past three trading days as they have watched the price of March milk, for example, run $2.50/cwt higher than thistime last week. As these prices have surprised even the brightest dairy market minds and blown forecasts out of the water, producers really ought to decide how to execute your marketing plans. We have recommended buying puts if you are bullish as it will achieve two things (1) it will protect a portion of your milk production and (2) it will allow you to postpone the sale of your milk while giving you some piece of mind. If there is profit margin available, dribbling sales on a percentage of your Class III and Class IV milk production is now recommended should that bring profit back to the dairy.

What was weak on Tuesday was strong again yesterday. The grain complex is topsy-turvy as it searches for more direction this week. According to Pete Ullrich, our outside technical expert, “the (corn) market still is undecided what to do about the medium-term top made at 6670 last week”. With market bears watching weather turning for the better down in South America, market bulls will have to lean on what remains to be strong demand and little sign of rationing at current levels. Of course, the market will be in a strong move lower before we start talking about rationing. Look for corn and soybeans to open mixed to firm this morning.


1/26 Class III Futures: Volume: 3,000 Open Interest (OI) Change: +1,094 Total OI: 37,542

1/26 Class III Options: Est. Put Volume: 703 Total OI: 29,199 Est. Call Volume: 369 Total OI: 25,235

1/26 Spot Markets: Block Cheese $1.6925 (UP 4 1/4, 0 Trades); Barrel Cheese $1.6425 (UP 1 1/4, 0 Trade)

Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.5925 (UP 4 1/4, 0 Trades), X $1.5575 (up 3, 0 Trades)

1/26 Other Dairy Futures Volume: Butter: 100 Dry Whey: 74 NFDM: 54 Class IV: 158 Cheese: 4 International SMP: 0


1/26 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11        $13.53         UNCH         Vol: 2        OI Change:         UP 1

Feb 11        $16.49        UP 19         Vol: 322     OI Change:         DOWN 90

Mar 11        $17.50        UP 49         Vol: 1,200   OI Change:        UP 511

Apr 11        $17.30        UP 29         Vol: 508      OI Change:        UP 206

Jan-June 2011                      Avg: $16.41                    UP 0.17/cwt

July-Dec 2011                       Avg: $16.70                    UP 0.04/cwt

Jan-Dec 2011                       Avg: $16.55                    UP 0.10/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.