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

Class III prices traded firm on lighter volume yesterday, as the CME spot cheese session provided a boost and the dry whey trade provided a headwind. Blocks rose 2 ¾ cents to $1.83, while barrels rose 1 ½ to close at $1.79, both prices at their highest since late 2008. Dry whey futures, however, traded steady to mostly lower Monday, keeping another Class III run at bay. Look for a mixed to lower open on Class III.

The supportive supply/demand fundamentals that came to light in January for dairy are still here this morning. Fresh cheese tightness sponsored in part by international demand to fill orders, some shifting of Class III milk into Class IV production in January and somewhat of a hoarding mentality developed by those who hold inventory, is still apparent as we enter week two of February. We don’t know when we will see cheese free up here at the exchange, but we suspect that the $1.80-plus level is going to serve as a call to action within the next few weeks at most.

On the milk-supply front, higher milk futures prices and the bullish sentiment of January have created a supply concern on Midwest manufacturers. Unseasonably cold winter weather in the Texas and New Mexico last week has generally tightened the available milk supply in the Southwest. Meanwhile, we hear that poor fluid milk sales in the southeastern region of the U.S. is freeing up more loads of raw milk than normal this time of year.

From a technical perspective, the surprise bull rally of January has not ended, nor has the expected corrective move on Class III taken place. Looking a little closer, the technical picture is somewhat murky lately. The trend is still up, but the market is wholly overbought. The March Class III contract continues to fail to take out technical resistance at $18.57, while the April contract (and May thru July for that matter) all made new contract high closes yesterday. The lead month here is March, however, and we anticipate that it will be the March that provides direction this week.

Class IV prices remained firm yesterday with the March through December futures average closing out at an impressive average of $18.89/cwt. While the talk is still bullish right now of butter and powder, the CME butter market remains static at $2.10 and the CME spot NFDM market was quiet for the second day in a row. The NFDM futures traded higher, but it appears that the cash market is appropriately priced for the time being. Cash-settled butter futures were lower yesterday, and we continue to hear of deals being done at lower levels than spot.

Overall, the picture this morning appears more mixed than it was a week ago. Stories of price increases are emerging. McDonald’s, for example, has already committed to raising prices in their latest quarterly conference call last week. Dunkin Donuts raised prices at the New Year.  Dairy prices are at a stark difference to two months ago, and we need to see how that holds up here in February.

Corn, Soybeans, Crude Oil and the U.S. Dollar are all oddly trading lower early this morning. Corn prices retreated some yesterday and there is an element of follow-through selling this morning. Brazilian agribusiness consultancy, Celeres, raised its expectation of Brazil’s 2010-11  corn crop from 52.6 to 53.5 million metric tons yesterday. Look for corn to open 3 to 5 lower and soybeans to open 5 to 8 lower.

 http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011025.pdf


2/7  Class III Futures:   Volume:  1,832 Open Interest (OI) Change:  -4407  Total OI:  36,368
2/7 Class III Options:  Est. Put Volume: 1,082 Total OI:  31,233  Est. Call Volume:  562  Total OI:  25,438
2/7  Spot Markets:   Block Cheese $1.8375 (UP 2 3/4, 0 Trades); Barrel Cheese $1.7900 (UP 1 1/2, 0 Trades)
Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.7200 (UNCH, 0 Trade), X $1.6900 (UNCH, 0 Trades)
2/7 Other Dairy Futures Volume:   Butter:  44 Dry Whey:  39   NFDM:  26 Class IV:  51 Cheese: 6 International SMP:  0 

2/7 Individual Class III Futures Prices, Change, Volume & Open Interest
Feb 11     $16.56                 DOWN 3               Vol:   175              OI Change:     DOWN 48
Mar 11    $18.56                 UP 6                       Vol:   419              OI Change:     UP 120
Apr 11     $18.32                UP 17                     Vol:   551              OI Change:     UP 85
May 11   $17.88                 UP 5                       Vol:   177              OI Change:     UP 18       
FEB-June 2011 Avg:     $17.70             UP 0.07/cwt
July-Dec 2011 Avg:      $16.61              UP 0.01/cwt
FEB-Dec 2011 Avg:       $17.11                UP 0.04/cwt

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Source:  FCStone/Downes-O'Neill