Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
The Class III market absorbed a bearish USDA Milk Production report and traded higher Tuesday. We’ve learned many times before to “be careful” when a market is not doing what you expect it to do. In this case, expectations were for weaker prices, but clearly the market is telling us that it has already priced in the burgeoning milk production picture for the time-being.
The big issue, then, is the spot market and the fact it stopped going down yesterday. Part of that is value-buying by domestic users. But the trade is keenly aware that U.S. cheese prices are running some 20 cents below the international market. Twenty cents has been the magic number to spur export business — the export bid for U.S. product. Traders expect this to be the case this time around and so futures — whether short-covering or new long positions going in — rallied yesterday. It is, however, not a foregone conclusion that export business will pick up with the pace we saw in 2011; for example, purely as a response to price. If those international markets don’t have the demand, they don’t have the demand. Right now, it seems those some phones have been ringing for product, but nothing to write home about. We will keep you updated.
Class III futures volume reached 1,167 contracts on the day which is moderate, but the early gains came on mostly lighter volume as just after the 1:10 settlement volume was under 850 contracts. The gains appear to have come mostly on short covering as open interest for all of Class III was higher. But all those increases were in 2nd half 2012, while 1st half 2012 saw open interest decline slightly. Although domestic buyers have stepped back into the spot market and may be able to move the market slightly higher in the short term, we don’t believe a rally will be sustainable given both what appears to be lackluster demand as a whole and growing milk production.
A surprising day of strong gains for the corn and wheat markets yesterday pulled up the soybean market as well. Both corn and wheat closed with double-digit gains — corn up 10.25 at 630.25 and wheat up 13.75 at 633.5. Those gains were enough to pull beans higher by the close after spending the majority of the day below unchanged due to stronger than expected rains for South America. Beans closed at 1220 up 2.5 cents on the day.
The extended forecasts south of the equator continue to look favorable for increased rains in the near future, and while that may not help the corn crop it seems a majority of the production declines have been priced in. And the rains today and in the forecasts should limit the damage to the soybean crop. It seemed most of yesterday’s activity was related to strong fund-buying and a firming Midwest corn basis. Our long-term view is unchanged, however, as the world remains flush with wheat and on any sizeable gains in price domestically the dropping demand can be clearly seen in weekly export reports and large stock levels indicating slow feed usage on corn. And once we get some rain, we expect the situation to stabilize and a swift return to post-report levels right around the $6.00 mark.
We look for corn to open 4 to 6 cents higher and for beans to open 1 to 3 higher.
Daily CME spot market prices:
Block cheese: $1.5050 (unchanged)
Barrel cheese $1.485 (unchanged)
Butter: $1.56 (down 0.5 cent)
Grade A NFDM: $1.45 (unchanged)
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.