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

Class III prices shifted higher again Wednesday on another very-light-volume day relative to daily trading volumes of the past month. Commercial buyers are still showing concern for Q3 and Q4 prices, and have been a primary driver of price strength in the July through December time frame so far this week. Producer selling continues to be lighter than during the past few weeks, and has provided little headwind to futures prices lately. Look for Class III to open steady to 10 cents per hundredweight lower this morning. 

With the CME cheese trade staring down the pivotal $2-per-pound mark, the Class III market has largely been winding down this week. The April contract, for example, has traded a 25-cents-per-hundredweight range all week, versus a range of more than 50-cents-per-hundredweight during the past six weeks. There is ambivalence by the trade as to the outcome of hand-to-mouth buying of late either igniting another panicked rally or truly shutting down to any extra loads at these levels. No one knows how that will play out, but we think it will eventually lead to slightly weaker cheese prices and we can take a cue for CME spot butter.

The CME spot butter price dropped for the fourth day in a row Wednesday. Since butter was the commodity de jour when the contra-seasonal rally developed, we expect that further weakening there may foreshadow a period of calmer nerves. Still NFDM prices remain well bid here at $1.80, and those firm prices may just keep more milk flowing into Class IV rather than Class III for the next few weeks, regardless of a continued pull-back in butter. Look for a mixed-to-lower opening on butter.

Turning to the general economy for a moment, January Retail Sales, which we announced earlier this week, rose 0.3 percent, almost half of what was expected.  Higher gas prices and brutal winter blizzards were to blame. While the picture for consumer spending should look a little brighter in 50-degree February weather, spending is largely extremely uneven and fickle here in 2011.

Milk production is scheduled to be released tomorrow afternoon at 2 p.m. central. We are looking for a 2.9 percent increase in the 23-states and number and a 2.5 percent increase in the total U.S. figure.

The grain complex traded firm overnight as the market recoils some from this week’s aggressive selling. Strong weekly export sales will like contribute to a higher opening for corn. Chinese buyers are still turning their heads toward South America to source soybeans, as their harvest is well under way. Regardless, look for a bounce on beans early today but expect traders to sell the rallies until other technical indicators play out.  


2/16  Class III Futures:   Volume:  1,419 Open Interest (OI) Change:  +211  Total OI:  38,773
2/16 Class III Options:  Est. Put Volume: 889 Total OI:  36,382  Est. Call Volume:  692  Total OI:  27,142
2/16  Spot Markets:   Block Cheese $1.9400 (UP 1/4 , 1 Trade); Barrel Cheese $1.9025 (UP 1/4, 1 Trade)
Butter $2.0550 (DOWN 1, 0 Trades); NFDM: A $1.8075 (UP 1, 0 Trade), X $1.7850 (UP 1, 0 Trade)
2/16 Other Dairy Futures Volume:   Butter:  106   Dry Whey:  58  NFDM:  39   Class IV:  63  Cheese: 15  International SMP:  0 

2/16 Individual Class III Futures Prices, Change, Volume & Open Interest

Feb 11     $16.93                 DOWN 3               Vol:   78                OI Change:     DOWN 45
Mar 11    $18.94                UP 17                     Vol:   426             OI Change:     UP 39
Apr 11     $18.78                UP 13                     Vol:   353             OI Change:     UP 57
May 11   $18.33                 UP 10                     Vol:   163             OI Change:     DOWN 1     

FEB-June 2011 Avg:     $18.18              UP 0.08/cwt
July-Dec 2011 Avg:      $17.22              UP 0.11/cwt
FEB-Dec 2011 Avg:       $17.66              UP 0.10/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