Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.” Antoine de Saint-Exupery
Wow, what a difference a report makes.
Wednesday night, Class III was actively traded and prices held firm. At 7:30 a.m. CST Thursday, the USDA released its quarterly report and it was a big giant bear, sharp-clawed bear of a report for the grain markets. At the release time, grain futures were closed but milk futures were open. Milk almost instantly flipped form positive to negative in price. Corn was quickly called to open limit-down as it began trading there on OTC desks all around.
It takes a big move in grains to have a same-day impact on milk, and we saw that in sentiment and trade activity yesterday. Futures volume was strong early on, but tapered off throughout the day despite an active spot cheese session which saw both block and barrel prices unchanged alongside 12 block loads traded. There is product available, but buyers are there to pick it up — the perfect definition of balance. And that’s where we see us at right now — balanced fairly well on cheese supplies and demand for the moment.
We struggle equally, in the short term, to see a 25-cent move either up or down in spot cheese pricing, although we lean a tad more to the bearish side right now. With whey prices holding firm, and appearing to do so for months, we fail to see milk falling much below $16.00, if at all below it, this quarter.
But, in commodities, things change in an instant as the grain markets saw yesterday.
New Zealand is off peak and slowing down, but late rains will likely prolong the N. Islands season and talk of Oceania inventories being larger than normal should keep them applying pressure to spot pricing for longer than usual. Even though those in Oceania wouldn’t want to, they probably won’t be able to stop it. Add to that Algeria stated inventories are strong and they won’t need to import powders for several months. To seal the deal in our eyes (toward the bearish side), the USDA has released its updated milk price forecasts and they raised them; it’s the kiss of death — that when whey prices do break, we think milk prices will too as we don’t see cheese headed to $1.80/1.90 for a long time.
To tip the scales to the bearish side, even slightly, take notice of the volumes being traded. This year, higher price days have been, with little exception, lower volume days than down days. Look at the higher number of puts being traded vs. calls. The market is in protection mode. The market is not always right, but it should be listened to.