Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III futures started firm Thursday after a lackluster overnight trade, but consistent trading throughout the day didn’t disappoint as the CME registered 1,422 contracts traded by the closing bell. Over the past week, 2011 contracts leaned on short-term technical indicators and outside markets to some degree to seek out gains.
While we have come off nearly 40 cents on spot cheese in the past few weeks, the world prices are not showing similar declines and the futures trade is respecting that by continuing to build a price premium to CME spot prices. At current levels, U.S. prices ought to draw in fresh demand from abroad — not to mention those domestic buyers who want to stock up after a difficult $2.00 price this summer.
But it was the Dairy Products report released after the close that doesn’t bode well for demand in general.
The Dairy Products report we got Thursday may be slightly bullish on the surface, but I think it speaks volumes about the material softening of demand. To see such widespread production declines against mixed to growing inventory figures makes me question how much of the production slowdown was due to manufacturer margin compression and how much was due to a general lack of orders. In other words, the lack of orders might be much worse than we thought, as indicated by an across-the-board decline in production.
Margins may get better here as milk prices come off some, but a lack of orders may be something we deal with into year-end. We have a pipeline refill going on now in cheese, which could boost prices slightly, but does not appear to be $2.00 demand. And once those buyers are filled up, who is going to be there to bid this market back up?
Corn: Prices remained well-supported into month-end but lost footing overnight Wednesday. By yesterday morning, it was a stronger U.S. dollar and a long holiday weekend ahead that turned slight pressure into a major sell-off; December corn finished down 29 cents to $7.78 ½. Soybeans finished down 20 to 24 cents lower, as well.
There were rumors that the FCStone yield projections could be wildly bearish, that was just one contributing factor to yesterday’s wild sell-off. With the report not released till after the close, it was interesting, but it was ultimately continued bullish news. In Fact, FCStone’s late Thursday yield projection of 146.3 bushels an acre on corn and 41.l05 yield on beans is par for the course and in line with many other bullish expectations. The market has traded on other factors like profit-taking and the stronger U.S. dollar and has told us all that for now: bullish news is priced in.
On Wednesday, Brazil’s Agriculture Ministry announced that it would reduce the ethanol blend in its gasoline, effective October 1, going from 25% to a 20% mix. The country’s 2011-12 cane harvest is lower on the year, and mills are producing more sugar at higher prices. It looks like they have a similar but not nearly as drastic a development with their ethanol wonder-fuel as we do.