What are the bearish factors in the dairy futures market?

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Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.

All dairy spot markets at the CME were higher yesterday, but that wasn’t enough to invigorate further futures price increases of significance in Class III milk, cheese futures or dry whey futures. Much of the reason for a lack of bullish futures price moves yesterday is simply attributable to the rally a day earlier which ultimately served as foreshadowing of what was to come yesterday.

With the bullish momentum of late and to balance the scales a bit vs. our bullish commentary of late (always good to play devil’s advocate), what are the bearish factors?

  • Milk production is still strong in the U.S.
  • Midwest milk production is strong and there are no signs of a shortage of fresh cheese.
  • Even California milk production is strong and excess/distressed milk is being offered at a discount.
  • There is again talk of implementing base restrictions in California.  
  • NFDM inventories are ample
  • Much of the bullish run-up in price has been in deferred months in anticipation (read as FEAR) of what might come as a result of what is going on in Oceania.
  • People are buying the rumor. That means they’ll likely want to sell the fact…
  • The premium being put into the market place is rather attractive and should allow people to store inventory and sell to protect it into the future, meaning it could come out of the woodworks at a later date and time.
  • Healthy profit margins on the board might incentivize dairymen to make more milk and keep bankers at bay.

Don’t get me wrong; as you’ve been reading for some time, we are bulls. But the market can and will eventually exhaust itself and at some point if you don’t grab what’s attractive it will turn ugly… be prepared, have a plan, and make sure to execute it.

Producers: Please don’t just stand by waiting for $25 milk and $4 corn; we fear for what might have slipped through your fingertips if you do. 18/22 min/max’s on milk and 4.25/6.00 min/max’s on corn you will not go wrong.

End users: You’ve been buying and now the time to buy futures is winding down ― call spreads, call spreads and min/max’s at these levels which are on the verge of becoming nose bleed.

We suspect there is more room to the upside in futures. But when it ends, it will likely end violently much as it rose. We remain on watch for a Class III price above $20 and a spot cheese price around $1.90, but they might not coincide with each other and that’s what market participants have to keep in mind.

Since last Thursday, the block price is up 4.50 cents at $1.7375; there have been 6 trades. The barrel price was 6.50 cents higher at $1.6625 with 7 trades. The spread is 7.50 cents, outside the historical range of 3 to 5 cents.

Spot session results:

Block cheese: $1.7375 (up 4.5 cents)

Barrel cheese $1.6625 (up 2 cents)

Grade A NFDM: $1.6825 (up 3.25 cents)

Butter: $1.70 (up 5 cents)

These data and 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., INTL FCStone Inc., 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.


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