Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O’Neill in Chicago, Ill.
Cheese and Class III futures markets bucked Tuesday’s dip, exploding higher yesterday on high volume (near 1,500 futures) volume in both futures and options (big call volume at 1,825). Clearly, things have aligned for future indicators to turn up, while spot in the immediate time frame is stalled hard.
Both blocks and barrels moved higher by ¼ cent and ¾ of a cent, respectively. The move in the blocks was small, though it may have been triggered a shift in short-term sentiment.
2013 Class III futures settled Wednesday’s session between 6 cents and 40 cents higher. The 2013 average finished the day +20 cents to $18.20 per cwt. The April contract led all gains at the end of the session +40 cents to $17.65 per cwt.
Years of experience trading this market has taught us that while one day does not make a trend, the talk of a bearish physical market to hold potentially right through spring flush might have been a bit too much too soon. When speculators and hedgers are too heavily weighted on one side of the trade, a slight shift in fundamentals or sentiment can all too commonly lead to dramatic swings in the opposite direction. Only time will tell if yesterday’s move is a last upswing in a yet-bearish market or if it is the beginning of an all-out market reversal. We hold our opinion that the immediate term has little upside, while the medium- and long-term are likely to be explosively bullish.
We do feel that producers must look at these types of rallies as an opportunity to cover some of their downside exposure, whether through the use of futures or perhaps the more preferable put options. The market is trying to get back to level footing, but we continue to expect the boat to rock back and forth. On one hand, year-over-year milk production gains of 5.5 percent and cheese production gains of 5.7 percent in Wisconsin during December can simply not be ignored. Not to mention, December 2012 dry whey stocks for human consumption, were reported just this Monday to be up 25.5 percent vs. last year and up 47.2 percent vs. month. One would think these fundamentals should keep Class III markets from running away. On the other hand, we are definitely hearing across the country that retail activity is picking up at current price levels, as well as export interest.
Note that last night was another evening session in a string of good-volume sessions. Most of them have been higher, but only a few have held and rolled into the day.