Editor’s note: This market commentary is provided by Dave Kurzawski, risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

Misery — or rather ‘upheaval’ — loves company. And it really loves company when we look to the Middle East/North Africa lately. Crude oil futures shot skyward Monday — $6.80 a barrel higher as of this writing — on news of further escalation of political unrest in Libya. Libya is the world’s 17th largest oil-producing country, but it seems to be the fear of spreading turmoil that is on the forefront of many oil-traders’ minds.

We have several other stories this morning, the impact of which we do not yet know. A massive earthquake hit Christchurch New Zealand, yesterday evening. While this southern region is more of a growth area for dairy production, as opposed to the northern part of the Island, the implications of such an event may disrupt dairy operations (transport). Our thoughts prayers are with the people of New Zealand during this disaster. 

On a no-less-light note, a news story about further “tainted” milk in China hit the presses late yesterday. This time, its name is more simply ‘leather milk.’ Apparently, Chinese dairy producers have been adding chemicals from tanneries to milk for years in order to increase the protein content of the milk. http://www.theepochtimes.com/n2/china/leather-milk-surfaces-in-china-51637.html  Just unbelievable.  

Class III milk traded sharply lower Friday ahead of January’s Milk Production Report. Another wave of dairy futures margin requirement increases along with some short-term technical weakness Friday were likely the primary culprits for selling pressure. While futures prices have rebounded nicely overnight Monday, look for Friday’s trade to be the beginning of a potentially larger futures price correction. 

To be sure, such a Class III futures price correction will hinge on the availability of fresh cheese.  While news on cheese is somewhat quiet to start this shortened week, CME spot activity ought to follow a lower Class III trade.  Look for a 0.05/cwt to 0.30/cwt higher opening this morning, as prices regain some lost ground from Friday.

While it has become evident that dairy product demand can overshadow discussions of supply over the past month, the USDA’s January Milk Production numbers will do little to change that this week. Milk production rose 2.7 percent and 2.3 percent for the 23-state and U.S. figures, respectively. Other than the fact that we continue to add to the herd, which illustrates very nicely the large number of heifer replacements we have in the country, January’s report is a non-event for the futures trade this morning.

The grain and bean markets spiked overnight with the sharply higher crude trade, but that knee-jerk reaction has faded and to the surprise of many prices have fallen this morning. Corn is called to open 9 to 12 cents per bushel lower and soybeans are expected to open 12 to 15 cents lower.
2/18  Class III Futures:   Volume:  2,359 Open Interest (OI) Change:  +328  Total OI:  39,764
2/18 Class III Options:  Est. Put Volume: 1,448 Total OI:  37,304  Est. Call Volume:  293  Total OI:  27,128
2/18  Spot Markets:   Block Cheese $1.9550 (UP 1/2, 1 Trade); Barrel Cheese $1.9175 (UP 1/2, 2 Trades)
Butter $2.0050 (DOWN 2 1/2, 1 Trade); NFDM: A $1.8300 (UP 1/4, 0 Trade), X $1.8000 (UP 1/4, 0 Trade)
2/18 Other Dairy Futures Volume:   Butter:  65   Dry Whey:  20  NFDM:  23   Class IV:  53  Cheese: 40  International SMP:  0 

2/18 Individual Class III Futures Prices, Change, Volume & Open Interest

Feb 11     $16.99                 UP 1                       Vol:   309              OI Change:     DOWN 47
Mar 11    $18.51                 DOWN 40            Vol:   528             OI Change:     UP 51
Apr 11     $18.06                DOWN 50             Vol:   358             OI Change:     UP 57
May 11   $17.85                 DOWN 38             Vol:   340             OI Change:     UP 72    
FEB-June 2011 Avg:     $17.79             DOWN 0.32/cwt
July-Dec 2011 Avg:      $17.02              DOWN 0.18/cwt
FEB-Dec 2011 Avg:       $17.37              DOWN 0.24/cwt

These data and these 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.

Source:  FCStone/Downes-O'Neill