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

A resilient Class III futures market took back the bulk of losses from Wednesday’s weaker trade yesterday.  What started as largely a consolidation trade heated up as the sellers of cheese who made their way to the exchange on Wednesday were absent from Thursday’s CME cash market session.  Futures continued to climb throughout the day, but when the dust settled we were no higher than we were on Tuesday.  In other words, we’re trading sideways.  This is an important distinction to make because we’ve made so much new ground to the upside on futures over the past month, that every time we trade higher we watch for that ‘next’ fresh high price.  Since Monday it has not happened.

Could this sideways trade be a brief reprieve before another 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.

All dairy product futures are ‘backwardated’ right now, which is bullish in structure.  For clarity purposes, a ‘backwardated’ market is one in which the nearby futures prices are trading higher than the deferreds.  As we said back during the October ‘10 rally, backwardated markets are not necessarily foreshadowing lower prices down the road but rather the need for product to come to market today.  Lately we haven’t seen much dairy product free up as demand – mostly from the international buyer for dry products – has absorbed a chunk of available product and kept would-be sellers at bay.

Honing in on cheese, the USDA announced international cheddar cheese price unchanged from the late January at $1.99.  At better than 20 cents to move cheese overseas, it is reasonable to expect that the market’s loud call for fresh cheese could be answered here around $1.80.  Some might say that we’re at the cusp of the days of old when U.S. cheese prices traded at a premium to the world, but I do not think that is the case.  Only time will tell.  Look for a mixed to lower opening this morning on Class III ahead of the CME spot cheese session.

February to December Class III settled at $17.04 yesterday, while February to December Class IV closed at $18.81 Thursday.  It is impossible to call a top here, but we continue to advise producers to be locking up profit where they can on at least a portion of their milk through year-end.  When everyone is bullish today, opportunities for long-term profitability open up.   

Grain and bean market bulls had their bowl of Wheaties yesterday with a fresh high close on Wednesday coupled with a continued geo-political uncertainties and very strong export demand.  Net corn sales of 1,166,700 tons set a marketing year high.  Net soybean sales of 1,032,300 tons were up 32 percent from the previous week.  But the firm trade to start the day turned lower by the close.  Buyers tread very lightly at these levels.  Look for a mixed opening on the grains.  Watch the US dollar as it is gain technical momentum to the upside.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011023.pdf


2/3  Class III Futures:   Volume:  2,021  Open Interest (OI) Change:  +380  Total OI:  40,760
2/3 Class III Options:  Est. Put Volume: 1,010 Total OI:  32,711  Est. Call Volume:  808  Total OI:  27,555
2/3  Spot Markets:   Block Cheese $1,7875 (UP 1/2, 0 Trades); Barrel Cheese $1.7550 (UP 3, 0 Trades)
Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.7200 (UNCH, 0 Trade), X $1.6900 (UP 2 1/2, 0 Trades)
2/3  Other Dairy Futures Volume:   Butter:  11  Dry Whey:  50   NFDM:  45  Class IV:  83  Cheese: 18  International SMP:  0 

2/3 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11    $16.63                UP 16                     Vol:   221           OI Change:     DOWN 64
Mar 11    $18.37                UP 33                     Vol:   464           OI Change:     DOWN 64
Apr 11     $18.08                UP 34                    Vol:   499           OI Change:     UP 26
May 11   $17.71                 UP 26                    Vol:   319           OI Change:     UP 110       

FEB-June 2011                    Avg:     $17.56             UP 0.26/cwt
July-Dec 2011                     Avg:      $16.60              UP 0.09/cwt
FEB-Dec 2011                    Avg:       $17.04              UP 0.17/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