Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
October’s USDA Milk Production Report was largely a non-event for the Class III futures market Wednesday. Modest futures price gains out of the gate, prompted in part by negative milk production in key cheese-producing areas like Idaho and New Mexico, quickly faded going into spot. Much of what was reported in Tuesday’s Production Report was already known and likely already factored into prices. The trade then focused on both blocks and barrels coming to the spot session. There seems to be growing concern that excess barrel cheese will have a negative impact on the block price as block sales slow going into the Thanksgiving holiday. Slowing production of cheese over the past month or so does not seem to be having an offsetting bullish impact against sales winding down.
Another element to consider is that Class III futures volume surged on weakening prices from just over 600 contracts on Monday and Tuesday to more than 1,266 yesterday. 1,266 is by no means heavy volume, but the uptick in volume is worth noting in large part because that volume came with slightly lower prices on the lead months of December thru February. With the December calculation starting next Monday, any stability to spot prices will eventually lead to a bounce. But, for now, we heed the futures market warning: spot is vulnerable to a seasonal decline. And with that we expect the futures market curve to work towards flattening out (i.e. we expect the spreads between months to narrow).
Spot session results:
Block cheese: $1.82 (unchanged)
Barrel cheese: $1.745 (down 1 cent)
Grade A NFDM: $1.965 (unchanged)
Butter: $1.65 (unchanged)
Corn and beans finished mixed as the market searches for more directional impetus. The corn market is flush with negative news, but also relatively oversold at current levels. We expect another round of sell-side activity heading into options expiration or shortly thereafter. Demand remains strong for soybeans, but it is thought that China may be close to filling their needs through February. Expectations of a record crop in South America and ideas that U.S. farmers are going to plant more soybeans next year is containing bullish enthusiasm. We expect choppier to lower behavior on soybeans/bean meal in the coming days as well.
The South American forecast sees dry weather to continue across the Argentine growing regions for the rest of this week. Moderate to heavy rains are then expected early next week, while the Southern Brazilian growing regions will see heavy rains fall today possibly into the weekend.