Lofty price levels lead to shaky cheese market

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

Europe’s financial worries zeroed in on Italian debt problems Wednesday morning and the U.S. dollar rallied strong from the uncertainty. According to The Wall Street Journal, the Italians have the world's third-biggest sovereign-bond market. Ten-year rates rallied as faith in Italy’s ability to reduce its fiscal deficit and service its debt faded Wednesday. While this news prompted a sell-off for U.S. equities and some commodities markets, the Class III market was left to show only modest declines.

1,084 Class III contracts traded hands during what was mostly a mixed trading day. Futures started off slightly firm, but lost footing prior to the spot market. Blocks dropped 3 cents to $1.8700 before bidding pushed the price back to .25 lower. Futures regained some lost ground as blocks firmed, but perhaps more telling was the barrel market. 

A bid for barrel cheese at $1.93 was pulled mid-session leading some to suspect current appetite might not be as strong as we thought when we started the week. Often, a market price is largely determined by what a buyer is willing to pay — and today may not some foreshadowing that they’re not willing to aggressively pay current high prices. The futures market seems to agree having closed mostly lower.

Forward curve discounts on Class III and high-priced feed keep producer selling at bay. Milk production remains on solid footing for the fall, but it does appear that producers are truly living on the edge of profitability. We suspect we’re on the brink of a significant direction move for the grain complex and will keep you updated on that move as it unfolds. But we’re now two weeks out from the Thanksgiving holiday. Producers ought to put first half-hedges to bed if they haven’t done so already.

Dairy Australia released milk production reports for September last night and production was up 6.4% vs. September 2010 while year to date production is up 2.2%.

One area that hasn’t received much attention is the Class III/Class IV spread, which has closed nicely over the past week. With both prices now sitting in the high $16.00 price range it is difficult to say which will tug and pull on the other. But we look for them to trade in tandem for the short-term. That said, Class IV futures did not trade today. Cheese futures traded 68 contracts between 0.007 lower and 0.006 higher today.

Overnight, Class III futures were mostly quiet with just 5 total trades by late night 4 of those trades were in November which was unchanged and on one trade January was down 10 cents. By this morning, the market remains quiet with just 8 total trades and futures holding the same price changes.

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