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

We’re still trying to figure out what is more unusual – a mid-January limit up rally in Class III on Friday or the Raji touchdown against the Chicago Bears yesterday?

If you watched the CME spot markets Friday, you would not have expected the type of day we had in Class III futures. Bullish technical indicators, margin calls and rumors of a major international dairy company issuing a force majeure on product deliveries helped to turn a firm Class III trading day into a buying frenzy Friday. Trading volume and Open Interest spiked as March and April finished limit up (up 0.75/cwt) on widespread buying panic. And that trading volume hasn’t gone away over the weekend. Sunday night Class III volume is over 800 contracts as this comment is written a prices have traded between 0.25/cwt lower and 0.10/cwt higher. Look for a mixed open this morning.

Questions abound as to the sustainability of the recent Class III move higher. Not only is the February contract, for example, running somewhere north of 13 cents better than the CME spot calculus, but the USDA delivered a relatively bearish Cold Storage Report after the markets closed on Friday. During a time when we normally drawdown cheese stocks, American Cheese in storage rose by a whopping 8.1 percent versus our expectations of a 5.3 percent increase. Not to be outdone, total Cheese increased by 6.1 percent versus 2.6 percent.

Inventories in December exceeded our expectations in every single category for which we issue pre-report expectations. The question will now become, how much of the product in the report was - or is now - spoken for? With out knowing the answer to that question, today’s Cold Storage numbers at face value are very bearish to market prices. Still, if buyers take their lead from futures, they may become more aggressive here in Chicago. At some point, they will need to push cheese prices higher in order to sustain this latest rally.

The annual International Dairy Foods Association (IDFA) meeting is underway in Miami this morning. We expect to have a better handle on overall market direction after the IDFA conference concludes in Miami this week. The processor community ought to come away from the meeting with a better picture on just how tight stocks of cheese, butter, NFDM, Dry Whey, etc. are – or are not.

Part of the rise in Open Interest on Friday was a jump in producer selling. Dairy producers who are bullish should look at buying put options as protection. Buying puts 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.

Grains were modestly higher overnight on follow-through buying from Friday. Informa pegged U.S. corn acres planted this year at 90.9 million acres Friday, slightly lower than what most would like to see – around 92 million acres. Initially, the news stirred traders into bidding up corn, but that rally faded by the end of that day leaving corn to finish 10 cents off its intraday high.

U.S. weekly corn exports came back stronger than expected Friday, with reported sales at 40.5 million bushels, above the trade guess top of 33 million bushels. Recent weeks have been far below this number and will be paid close attention by traders. Look for a mixed opening on grains this morning.

 

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011014.pdf

1/21 Class III Futures: Volume: 3,966 Open Interest (OI) Change: +629 Total OI: 34,060

1/21 Class III Options: Est. Put Volume: 2,087 Total OI: 26,930 Est. Call Volume: 1,629 Total OI: 24,435

1/21 Spot Markets: Block Cheese $1.5250 (UP 2 1/2, 1 Trades); Barrel Cheese $1.5100 (UP 2 1/4, 0 Trades)

Butter $2.1000 (UNCH, 1Trades); NFDM: A $1.5225 (UP 1/4, 1 Trade), X $1.4900 (UNCH, 0 Trades)

1/21 Other Dairy Futures Volume: Butter: 58 Dry Whey: 73 NFDM: 17 Class IV: 54 Cheese: 25 International SMP: 0

 

1/21 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11        $13.50       UNCH     Vol: 237      OI Change:         DOWN 182

Feb 11        $15.93       UP 59    Vol: 730       OI Change:        UP 100

Mar 11        $16.25       UP 75    Vol: 785       OI Change:        UP 29

Apr 11        $16.42       UP 75     Vol: 592       OI Change:       UP 75

Jan-June 2011                    Avg: $15.83                     UP 0.52/cwt

July-Dec 2011                     Avg: $16.47                     UP 0.24/cwt/cwt

Jan-Dec 2011                     Avg: $16.14                     UP 0.37/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.

Source: FCStone/Downes-O'Neill