Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III volume continued to be strong yesterday with near 2,000 trades taking place. Price pressure continued on futures with the grain market falling and a continued “risk off” general market trade.
The current price fall is not so much bearish in nature as it is a correction of the large premium priced into futures vs. current spot market pricing. The blocks traded down a ¼ of a cent before closing unchanged yesterday, and that seemed to keep the bottom from falling out of futures, along with a late-day rebound in grain pricing as well.
On the day, futures closed 11 to 22 lower from Aug through Dec 2012 and mixed from +4 in April, the lone month to close higher to -32 in January.
We can’t say we expect the recent activity to change too much until the futures get more into line with current spot pricing or we start to see grains and general markets rebound to justify the carry in futures. While pricing in a margin for producers doesn’t seem to be possible currently, the first-quarter average of 18.24 would be the highest Q1 average in history, beating 2008 which averaged 18.12 and the next nearest year 2011 which averaged just 16.63. Producers should be looking into buying calls against the corn and soy meal markets, while looking at put spreads or in some cases where a margin would be available min-max strategies.
Wicked volatility is the norm these days for the grain markets, so on the heels of Monday’s declines prices opened lower and moved to limit down at mid-day yesterday on both corn and soybeans. Massive amounts of long covering from funds and specs alike triggering the huge intraday movement, but little seems to be changed from a fundamental standpoint. Weather is still warm and though some rains are falling it’s never “enough.”
We’d look to buy cheaper short dated calls and call spreads on corn and soy meal, given the size of the recent declines and hope that the crops are better than what the market thinks or that rains come in a better than forecasted manner over the next few weeks to tack on some late-season bushels.
Daily CME spot market prices:
Block cheese: $1.7175 (unchanged)
Barrel cheese $1.695 (unchanged)
Butter: $1.6225 (up 1.25 cens)
Grade A NFDM: $1.375 (up 0.75 cent)
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