Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.

We have a futures market that is decisively trading at a premium to cash, and we have not had that in some time. One cannot deny that the futures trade has shifted from decisively bearish to more bullish over the past few weeks. In fact, yesterday’s futures gains, which were primarily in July through September contracts, show that we’ve had upwards of a 13 percent futures price swing to the upside since May 3. Such gains are not isolated to the Class III contract. July cheese and July butter contracts also posted gains of 8.9 and 8.7 percent, respectively, during roughly the same time period. Weather concerns, better demand due in part to food service promotion, technical indicators and a brow-beaten producer community that stepped away from selling the sub-$15 market of a few weeks ago, all played an important role. 

Is it justified?  Probably not ― not yet at least. But traders tend to shoot first and ask questions later.  When the market calms and questions get asked, we expect prices will tumble for at least a little while as the market catches its breath. But the past two weeks may serve more importantly as an indicator of future events to unfold.  

The April USDA Cold Storage Report is rather neutral, possibly slightly bullish for cheese and bearish for butter. Total cheese in inventory fell 1.5 percent from April 2011 to 1,024.8 million pounds, which was largely in line with our pre-report expectations of a 1.9 percent decline. Part of that can be attributed to 11 million more pounds of cheese found in the “other cheese” category, which was still down 5.2 percent from last year to 385.2 million pounds. We were expecting a decline of 7.9 percent for “other cheese.” 

American cheese stood alone in growing stocks from year-ago levels up 1.0 percent from last April to 622.1 million pounds.  Not only is that lighter than our expectations of a 2.1 percent increase ― or 7 million pounds ― in American cheese stocks, it is also approximately 10 million pounds below the five-year average growth rate. It’s a somewhat empty victory for the market bulls, however, in that we maintain some 40 million pounds more inventory of American cheese than that same five-year average. 

The real surprise is not with cheese, but with butter stocks. Butter inventories ballooned by 45.6 million pounds ― nearly double butter’s five-year average growth rate of 22.997 million pounds ― to 253.85 million pounds in storage. We have to go back to August of 2009, when CME spot butter was trading around $1.15 pounds, for a similar storage situation.

This report tells us that, by and large, demand for cheese is stable and demand for butter is weak. Classes III, cheese and butter have all experienced a futures price bounce to varying degrees over the past week or so. So, the question is: does this report warrant more futures price gains above the 10 percent rally nearby futures prices have experienced over the past two weeks? We don’t think so. Given what we know today, we look for prices to retreat after this report.

In the grain complex, the recent crop progress reports continued to weigh on the markets, as corn is 96 percent planted and beans are 76 percent planted. Adding fuel to the selloff was the strength in the U.S. dollar in a bit of a risk off trade yesterday. Improved weather forecasts were also a factor. And, while the trend is to the downside now, we have to accept the volatility that comes with a weather market which we are likely to be in for months to come. We approach this with a bearish bias, but are on guard for more choppy activity in this current trading range.  

We look for corn to open 3 to 5 cents higher and soybeans to open 8 to 10 lower.

Daily CME spot market prices:

Block cheese: $1.50 (unchanged)

Barrel cheese $1.46 (unchanged)

Butter: $1.385 (unchanged)  

Grade A NFDM: $1.13 (up 0.5 cent)

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.