Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
The bull rally roared loudly yesterday following last week’s selloff and Monday’s flat session which might have had many Class III bulls close to throwing in the towel.
Heat and humidity affecting milk production have clearly been an issue for the western states since late June really coming to a head in the last 10 to 14 days as demand increases have been noted alongside depleting supplies out West. Some of the numbers being reported via clients have their milk production down around 10 percent vs. same time period last year. Temperatures might have leveled off in central valley California on the daily highs (still over 100 degrees), but lows are staying around 80 degrees in key producing areas through the evenings ― cows don’t like this. But reports of heat stress and decreased components have indeed spread to large dairy-producing states such as Idaho, Wisconsin and New York, as well. As stated many times throughout the past few weeks, summer heat is not abnormal, yet this widespread heat event with International SMP prices above $2 per pound must be respected as a potential game changer.
By day’s end, August Class III would finish up 43 cents on the session to $18.08 per cwt. The gains were substantial, yet the contract still remains under last Wednesday’s top of $18.18 per cwt. However, September and October Class III futures easily cleared through last week’s resistance, and even made new highs for the month. September finished up 68 cents to $18.98 and October eventually closed up 55 cents to $18.83 per cwt. The August to December pack average gained 42 cents on the day to $18.43 per cwt.
Current spot markets, however, yield a much lower Class III price of $17.04 per cwt. Excess premium in this market appears to be playing a schizophrenic game of hide and seek: now you see it, now you don’t… Yet, these levels will be unsustainable without increased aggression from buyers during the ensuing spot sessions.
Spot session results:
Block cheese: $1.675 (unchanged)
Barrel cheese: $1.65 (up 0.5 cent)
Grade A NFDM: $1.7525 (up 0.25 cent)
Butter: $1.4825 (up 0.25 cent)
The grain markets were off to the races overnight and into yesterday morning’s early trading session, but they cooled drastically as the day wore on. With funds net short corn, many wonder when the rush for the emergency exit will ensue and who will get trampled in the ensuing chaos. Significant heat dome risk persists during key growing times late this month. And with so much of the market talking $4.50 corn, we might have already sold the rumor only to be positioning ourselves to buy the facts in due time. The risks far outweigh the potential rewards in the current market environment, and corn buyers should be reverting to call spreads or min/max strategies to protect attractive levels vs. recent years’ worth of pricing activity.
This morning, we look for a lightly mixed open to the grain complex with corn soft, beans a few cents lower and wheat slightly higher.
The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Any reference to past performance is not indicative of future results. All references to futures/options trading are made solely on behalf of FCStone, LLC. All references to swap execution and bi-lateral swaps are made solely on behalf of INTL Hanley, LLC. FCStone, LLC will clear swaps when applicable. Swaps are only available to eligible counterparties. All observations of economic, political and/or market conditions are not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. and its subsidiaries and should be construed as market commentary. All recommendations to buy or sell a specific derivative or forecasting statements regarding market activity and the pricing thereof should be construed as a solicitation in any jurisdiction in where such an offer or solicitation would be legal. Proper context and guidance including but not limited to the particular trading objectives, financial situations and the needs of the intended audience were taken into consideration when this recommendation was prepared. Contact your account representative for specific advice to meet your specific trading preferences or goals. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. and its subsidiaries. Sources of information believed to reliable were used in preparing such observations, and no guarantee or representation regarding the accuracy of those sources has been made. INTL FCStone Inc. and its subsidiaries are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material.