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

Class III traded lower early Tuesday and turned higher on continued firming of the CME spot cheese prices and a higher dry whey futures trade. Trading momentum was to the upside as March through July contracts edged into new contract high territory yet again. But, it is becoming more and more apparent that the Class III market needs a rest. We are not predicating, nor do we expect, a complete reversal of January’s move, but a futures price pullback will occur. We realize that this commentary sounds like the boy who cried wolf having called for a corrective pull-back to futures prices over the past five or six trading sessions. All we can say is that, eventually, he was correct.

Fortunately, there is more to it than that. Yesterday’s Class III futures trade, while higher and still bullish, is not running briskly ahead of the CME spot cheese market as it has for the past three or four weeks. The spread between CME spot cheese and the front trading month of March has narrowed to a mere penny or so and discounts on futures prices develop beyond that. If we are to conclude that — all things being equal in the other dairy markets — Class III led CME spot cheese market for the past month, we would be remiss not to point out that Class III is showing signs of running out of that premium building gas that kept market participants panicked. Look for a mixed to lower opening this morning on Class III.

For the second trading day in a row, all was quiet on the NFDM spot call yesterday. Futures continue to edge higher as buyers see value relative to cash prices. We hear that NDFM is loosening up in the country, and it appears as though the $1.70 mark is providing resistance and incentive to let some product go. The California Weekly Average Prices (CWAP) rose 4.51 cents from last week to $1.2946 on a somewhat lighter 9.828 million pounds. Look for NFDM and Class IV to trade steady to firm this morning.

CME Spot Butter continues to beat the $2.10 drum and with that we expect the real potential of butter price weakness. Had the export bid moved in a strong way from around the $1.80 level, we expect it would have been realized by now and butter prices would be higher still. The January standoff is coming to a close and we expect that the next move will be some price weakness for at least a little while.

The USDA World Supply/Demand Estimates, released this morning, look bullish for corn in particular and the entire grain complex in general. Corn ending stocks were trimmed more than expected at 675 million bushels versus 745 million last month. The USDA also raised ethanol usage by 50 million bushels from last month. Look for corn to open 20 cents higher and soybeans to open 10 to 15 cents higher.

This news looks to be the needed boost to push corn futures prices over the infamous $7/bu. level. But, as we have said in the past and will continue to harp on here this morning, market direction tends to be decided at the culmination of ‘report’ days, not the start gate. Take a look at the attached for more details on today’s numbers.

2/8  Class III Futures:   Volume:  2,099 Open Interest (OI) Change:  +251  Total OI:  36,618
2/8 Class III Options:  Est. Put Volume: 1,768 Total OI:  32,011  Est. Call Volume:  431  Total OI:  25,454
2/8  Spot Markets:   Block Cheese $1.8700 (UP 3 1/4, 1 Trade); Barrel Cheese $1.8200 (UP 3, 1 Trade)
Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.7200 (UNCH, 0 Trade), X $1.6900 (UNCH, 0 Trades)
2/8 Other Dairy Futures Volume:   Butter:  128  Dry Whey:  72  NFDM:  27 Class IV:  91 Cheese: 32  International SMP:  0 

2/8 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.70                 UP 14                     Vol:   341              OI Change:     DOWN 136
Mar 11    $18.61                 UP 5                       Vol:   370              OI Change:     UP 6
Apr 11     $18.47                UP 15                     Vol:   471              OI Change:     UP 87
May 11   $18.08                 UP 20                    Vol:   373              OI Change:     UP 109       
FEB-June 2011 Avg:     $17.86             UP 0.16/cwt
July-Dec 2011 Avg:      $16.66              UP 0.05/cwt
FEB-Dec 2011 Avg:       $17.20              UP 0.09/cwt

These data and these 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