Editor’s note: This market commentary is provided by Dave Kurzawski risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.
Class III futures retreated yesterday closing anywhere from $ 0.01 per hundredweight to $0.24 per cwt. lower on a moderate 1,993 contracts trading hands. This prices weakness came in the face of higher still cheese prices here at the Chicago Mercantile Exchange. Block cheese rose 1-cent to close out at $1.7025 while barrels shot up 4 cents to $1.6825. Since last Friday, the block price is up $17.75 cents and the barrels have gained 17.25 cents. In both cases these are prices not seen since the tail end of October 2010. Overnight, selling is pushing Class III prices $0.50 per cwt. to $0.10 per cwt. lower on relatively light volume. Look for more downward pressure early this morning.
January has been a head-spinner for the dairy industry. With Class IV prices leading the charge, Class III prices have move from a more bearish cost-of-carry structure to a more bullish backward-dated structure and tacked on more that $2 per cwt. for some months in a week’s time. We discussed the possibility of a pipe-line refill that appeared imminent back in December, but never expected the kind of fury we’ve seen this week. The question now should be one of sustainability. As we roll the calendar into February will we see a more moderate temperature of both international and domestic demand? If we do, expect prices to give back a chunk of January’s gains in February.
While Class IV prices have been a key ingredient to the dairy complex rally in general and Class III in particular, another driver of the rally on class III that doesn’t get as much airtime has been the rally on dry whey. What was a quiet market, has become victim of buyer panic. Dry whey stocks have been tight for months, but it didn’t seem to matter until the buy switch was flipped. Continued firm bids for export have catapulted U.S. dry whey futures by 10- to 15-cents per pound over the past two weeks. That alone adds $0.60 per cwt. to $0.90 per cwt. to Class III. Whey futures have put in at least a short-term top here and are trading 1- to 3-cents lower overnight.
Producer selling has picked up over the past three trading days as they have watched the price of March milk, for example, run $2.50 per cwt. higher than this time last week. With as much uncertainty in the market today, producers really ought to decide how to execute your marketing plans. We have recommended buying puts if you are bullish dairy.