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

Class III traded mixed early and finished lower on heavier volume yesterday. Specifically, 2,851 contracts changed hands as sellers acted as the aggressors, ignoring the continued CME spot cheese advance. The April contract Class III fell as much as 0.36/cwt intraday. The fundamental picture hasn’t changed this morning. Look for a firm opening this morning as the market trades off some of Thursday’s losses.

Looking a little closer at Class III activity, open interest is still climbing nicely, but trading volume is dropping off. In January and the beginning part of February, volume and open interest spiked for class III as price rose sharply. This week, however, the regular 3,000- and 4,000-contract sessions of a few weeks ago have given way to half as much trading volume. The lower volume trade is not indicative of a correction necessarily, but rather shows more of a market consolidation is under way. We think of the consolidation as more of a pause before a correction to both cash and futures prices.

When prices are moving higher, market analysts are required to give readers/customers fundamental reasons for the advance. In reality, most of the big bull moves are caused by buyers following a relentless upward trend. When the price directions turns down, the trend following traders change with it and sell. Usually fundamentals have changed little at that time, but frequently prices fall sharply because of the trend change.

The CME spot butter market was under slight pressure again yesterday, but this time the offers were met with a bid. Two loads of butter traded at $2.03/lb., above expectations of a $1 handle attracting buyers. As we have noted, the fundamentals are bullish on butter right now and have been for some time. But the price action is less convincing.   

Butter buyers who need to build inventories do not want to do so above $2 per pound. If those buyers felt as though $2.10 was the best the market had to offer for the next few months — if they were truly worried — it is safe to expect that they would have moved their bid up weeks ago. The standoff at $2.10 is over and now we will see if another one develops at $2 per pound or so. We think that more selling and still lower CME butter prices are on the docket, however.

Stronger NASS dry whey prices were met with continued weak NDM NASS prices. Dry whey is at 42.01, while NDM came in at $1.3614. Look for a mixed trade on both dry whey and NDM futures today.

Milk production is scheduled to be released this afternoon at 2 p.m. central. We are looking for a 2.9 percent increase in the top 23 states and a 2.5 percent increase in the total U.S. figure. While we eagerly await these numbers, we don’t think they will mean much if announced anywhere close to expected. 

Grains rallied sharply yesterday only to fade overnight. The rally was led in part by soybean prices and the fact that soybean futures had lost $1 per bushel over the past week. Yesterday’s soybean trade was a reconciliation of those losses amid vanilla news, and corn was along for the ride. John Deere announced that they see U.S. corn acreage reaching 92.0 million acres this year, matching the USDA baseline forecast. They look for soybean acreage to exceed the preliminary USDA numbers by one million acres at 79.0 million acres. Look for a 5- to 7-cent lower opening for corn and a 18- to 22-cent lower for soybeans.

2/16  Class III Futures:   Volume:  2,851 Open Interest (OI) Change:  +694  Total OI:  39,449
2/16 Class III Options:  Est. Put Volume: 707 Total OI:  36,884  Est. Call Volume:  361  Total OI:  26,925
2/16  Spot Markets:   Block Cheese $1.9500 (UP 1, 2 Trades); Barrel Cheese $1.9125 (UP 1, 0 Trade)
Butter $2.0300 (DOWN 2 1/2, 2 Trades); NFDM: A $1.8275 (UP 2, 0 Trade), X $1.7975 (UP 1 1/4, 0 Trade)
2/16 Other Dairy Futures Volume:   Butter:  33   Dry Whey:  13  NFDM:  29   Class IV:  149  Cheese: 35  International SMP:  0 

2/16 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.98                 UP 5                  Vol:   114           OI Change:     DOWN 78
Mar 11    $18.91                 DOWN 3             Vol:   643           OI Change:     UP 151
Apr 11     $18.56                DOWN 22            Vol:   709           OI Change:     UP 299
May 11   $18.23                 DOWN 10            Vol:   615            OI Change:     UP 77    

FEB-June 2011 Avg:     $18.11              DOWN 0.07/cwt
July-Dec 2011 Avg:      $17.20              DOWN 0.02/cwt
FEB-Dec 2011 Avg:       $17.61               DOWN 0.05/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