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

The winter blizzard that wreaked havoc on the Midwest in general and Chicago specifically has come and gone, leaving in its wake weaker Class III prices. Wednesday trade was dominated by an aggressive sell side — a mix between speculative profit-taking and light producer sellers.  Class III Open Interest, which eclipsed the storied 40,000 contract mark on Tuesday, rose only marginally yesterday (139 contracts) on a somewhat lighter 2,300-contract volume trade. Open Interest declined slightly in the February and March contracts — the lead months lately.

It wasn’t the snow or wind that dropped Class III prices, but rather the uneasy feeling regarding the CME cash cheese session. For the first time in six trading sessions, block cheese was brought to the exchange, while two loads of barrel cheese kept a lid on the barrel price. Although buyers quickly bought the block loads and bid the market higher, still, the fact that both block and barrel cheese showed up was an ominous headwind for the Class III futures trade. Class III finished 10 to 40 cents per hundredweight lower. 

Look for a mixed to firm trade to start today as the market consolidates from yesterday, but expect further futures price weakness if cheese sellers bring more product to Chicago today.  And maybe even if they don’t, as Class III futures still look ripe for a corrective trade downward.

In addition to cheese coming to the exchange yesterday, loads of butter appeared as well. Buyers bought five loads of butter yesterday at $2.10, putting pressure on cash-settled butter futures prices across the board and sending the March contract into a tailspin reaching its limit move to the downside, five cents. We have been hearing that butter is trading in the country below CME spot for a few days now and it appears as though those sellers see value in bringing some piece of that product to the exchange. Still, the standoff here continues, but it will end. And when it ends, we expect butter prices to descend into the $1.80 range at least.

CME spot NFDM continues to push to the upside with Grade A jumping three cents to $1.72 on three trades. We’ve been hearing $1.70 to $1.75 level is still moving product well, but the anecdotal discussions of prices shooting higher still are beginning to wane somewhat.  Interestingly, NFDM futures did not trade at all yesterday. It makes a person wonder how aggressive the buyers are going to be in the coming days and weeks. From where we stand, there continues to be legitimate tightness to powder in the world, but further gains for the moment look fleeting.

Corn has broken out to the upside from the recent trading range. While market bulls continue to look at the United States’ “export our way out of a recession” policies in general and tight balances sheets and bad weather around the world in particular, nobody will know when the bull run will be completed and what the value of a bushel of grain will be worth at the peak. What we do know is prices always get to an unsustainable level on these runs. And we will have a better feeling today if this latest “new high” price on corn, for example, will be marking territory for the run to $7 per bushel-plus or a massive pre-Chinese New Year head fake. Look for a mixed to weaker opening in line with the overnight trade.

2/2  Class III Futures:   Volume:  2,365  Open Interest (OI) Change:  +139  Total OI:  40,382
2/2 Class III Options:  Est. Put Volume:  81 Total OI:  32,581  Est. Call Volume:  126  Total OI:  27,305
2/2  Spot Markets:   Block Cheese $1,7825 (UP 2 1/2, 2 Trades); Barrel Cheese $1.7250 (UNCH, 2 Trades)
Butter $2.1000 (UNCH, 5 Trades); NFDM: A $1.7200 (UP 3, 1 Trade), X $1.6650 (UNCH, 0 Trades)
2/2  Other Dairy Futures Volume:   Butter:  83  Dry Whey:  40   NFDM:  0  Class IV:  21  Cheese: 22  International SMP:  0 

2/2 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.47                 DOWN 18             Vol:   252             OI Change:     DOWN 86
Mar 11    $18.04                DOWN 40            Vol:   768            OI Change:     DOWN 74
Apr 11     $17.74                DOWN 38            Vol:   667             OI Change:     UP 162
May 11   $17.45                 DOWN 19             Vol:   256              OI Change:     UP 44       
Jan-June 2011 Avg:     $16.66              DOWN 0.23/cwt
July-Dec 2011 Avg:      $16.51              DOWN 0.16/cwt
Jan-Dec 2011 Avg:       $16.78               DOWN 0.19/cwt

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Source:  FCStone/Downes-O'Neill