Editor’s note: This market commentary is provided by Dave Kurzawski, risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

The tragic events in Japan have dominated the news wires and the financial markets overnight. Commodities were lower Sunday night as the shoot-first response of traders is to expect a significant — albeit short-term — drop in Japanese demand for oil and other key commodities. And beyond that potential, markets are jittery surrounding the uncertainty of weather events and political friction around the world. Welcome to Mid-March. 

The normally isolated dairy commodity markets are falling victim to the same world issues that push and pull on other commodity prices. Still well within the correction we’ve been describing since late-February, Class III futures closed mostly lower Friday — and sharply lower on the nearby contract months. It seems tough to make an argument for further loses without some surrender from the CME spot cheese market.  But given the recent futures trade, that is exactly what we should expect — weakness on the CME cheese market sooner rather than later. Look for a mixed Class III trader early.

We continue to hear anecdotal reports of cheese freeing up in the upper Midwest. We hear export sales still happening, but at a slower pace than a month ago (margins are much tighter on those deals). With mixed news there, we tend to focus more on domestic demand for the short-term.  And consumer confidence is not doing so well here in March. 

The Thomson Reuters/University of Michigan preliminary read of consumer sentiment plummeted from 77.5 to 68.2 in early March — in response to increased turmoil in the Middle East and soaring oil prices. Low-income households are having a particularly hard time balancing their budgets with no increase in their wages, limited (if any) access to credit, and surging prices at the pump.

The CME spot butter market maintained steady pricing north of $2.10 all of last week. During recent commentaries, I’ve said to expect an underpinning of Easter Holiday buy support as supply remains tight. At this point, however, I’d like to pull back on our pre-holiday supportive notions for the butter market. Market expectations for a re-test of the October 2010 high of $2.2350 were in the cards for the next few weeks, but I don’t expect that to be the case now. Not with the negative posture of other commodity markets and demand this morning. Look for a mixed opening on butter futures.

Grains continue to sell off overnight, having been beaten and battered to the downside as speculators take their money out. This morning market is the 7th morning of selling pressure on corn, and we expect that the market will bounce some today. But the trend is edging closer and closer to turning downright bearish for grains. If that happens, the wheels will come off the grains bull cart and the news of huge acres or policy changes or export demand waning will follow. 

We don’t expect much of a trend shift ahead of the March 31 Planting Intentions report.  If we get giant acres and a 162-163 yield, stocks will increase and prices will go lower. If we get both large acres and a larger than trend yield, corn prices are still overvalued at today’s levels. Look for a 3- to 5-cent lower opening on corn and a 10- to 13-cent lower opening for soybeans.

3/11  Class III Futures:   Volume:  2,286  Open Interest (OI) Change:  +174  Total OI:  37,216
3/11 Class III Options:  Est. Put Volume: 1046 Total OI:  38,671 Est. Call Volume: 1113  Total OI:  28,708
3/11  Spot Markets:   Block Cheese $2.0150 (UP 1/4, 0 Trades); Barrel Cheese $1.9650 (DOWN 1 1/2, 4 Trades)
Butter $2.1200 (UNCH, 6 Trades); NFDM: A $1.7900 (DOWN 2, 0 Trade), X $1.8025 (UNCH, 0 Trade)
3/11 Other Dairy Futures Volume:   Butter:  83   Dry Whey:  187   NFDM:  27   Class IV:  64   Cheese: 56   International SMP:  0 

3/11 Individual Class III Futures Prices, Change, Volume & Open Interest

Mar 11    $19.65                 UP 5                       Vol:   117              OI Change:     UP 18
Apr 11     $17.41                DOWN 46             Vol:   651              OI Change:     UP 10
May 11   $16.57                 DOWN 31             Vol:   366             OI Change:     UP 66
June 11   $16.40                DOWN 26            Vol:   353             OI Change:     UP 44
March-June 2011 Avg:           $17.51                 DOWN 0.24/cwt
July-Dec 2011 Avg:                   $16.83                 DOWN 0.06/cwt
March-Dec 2011 Avg:              $17.10                 DOWN 0.14/cwt

These data and these 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., International Assets Holding Corporation, 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.

Source:  FCStone/Downes-O'Neill