Spot cheese higher, Class III shows weakness

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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.

The issue we’ve run into is the valuing of those options that provide a floor for your production. Such a dramatic rally in prices has kept would-be option sellers looking for more option premium. Whether or not you’re bullish or bearish, the risk of a substantial albeit perhaps short-term futures price decline is on everyone’s mind. If there is profit margin available, dribbling sales on a percentage of your Class III and Class IV milk production is now recommended should that bring profit back to the dairy.

Keep your eyes on the price of gold and the value of the U.S. dollar. An unusual situation developed yesterday as they both finished lower (gold sharply lower) on the day. This may be a one-off or it may be a sign of further deflationary pressure yet to come in 2011. With the yet to be resolved economic maladies that seem to be on a flying saucer tour across Europe; every other month it’s a different country. And with the news this week that Standard and Poor's rating agency downgraded Japan’s debt from AA to AA-, I continue to have a more bullish tilt on the U.S. dollar here in 2011. But yesterday’s gold-dollar trade should catch our attention.

The Federal Open Market Committee said yesterday that they see no reason to change rates or the current QE2 plan to spend the earmarked $600 billion in government purchases of long-term U.S. Treasury bonds.

The grains continued to trade in a more sideways zigzag manner Thursday. From a technical perspective a move out of the late price range appears imminent (within a week). Look for grains to open slightly firm this morning.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2011018.pdf

 

1/27 Class III Futures: Volume: 1,993 Open Interest (OI) Change: +647 Total OI: 38,180

1/27 Class III Options: Est. Put Volume: 751 Total OI: 30,532 Est. Call Volume: 654 Total OI: 25,614

1/27 Spot Markets: Block Cheese $1,7025 (UP 1, 0 Trades); Barrel Cheese $1.6925 (UP 4, 1 Trade)

Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.6325 (UP 4 , 0 Trades), X $1.6000 (up 4 1/2, 0 Trades)

1/27 Other Dairy Futures Volume: Butter: 118 Dry Whey: 108 NFDM: 62 Class IV: 118 Cheese: 51 International SMP: 0

1/27 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11          $13.52           DOWN 1        Vol: 53        OI Change:     DOWN 39

Feb 11          $16.48           DOWN 1        Vol: 331      OI Change:     UP 42

Mar 11          $17.49           DOWN 1        Vol: 495      OI Change:     UP 146

Apr 11          $17.19           DOWN 11      Vol: 457       OI Change:     UP 224

Jan-June 2011                      Avg: $16.33                      UP 0.07/cwt

July-Dec 2011                       Avg: $16.55                      UP 0.15/cwt

Jan-Dec 2011                        Avg: $16.43                      UP 0.12/cwt

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Commodity trading involves risks, and you should fully understand those risks before trading.





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