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

While the momentum of CME spot cheese, Class III Milk and Cheese futures prices are clearly on the rise since the end of June, Friday’s futures trade appeared to be a week ending corrective sell-off on light volume. Other potential reasons for the sell-off could have been the lone trade taking place in the CME spot block market on Friday at $1.57, the lack of movement of the barrel price since last Wednesday and traders squaring positions ahead of today’s Milk Production report.

However, as Class III prices crossed over the $15.00/cwt level last week August through October and approaching those levels in the fourth quarter, we suspect there are a number of dairy producers eager to lock in or protect these profitable prices and has been some of the trading volume on the sell side. Forward-contracting volume has been on the rise over the past couple of weeks, and we have continued to urge our producers to look at put options as a way to protect their income through the rest of the year.

Overnight Class III futures volume has been light, but September is trading double digits higher. We look for the return of higher spot and futures prices this morning. When prices turn higher, producers often feel a sense of profit security without actually locking up profit margins. After a year like 2009, we don’t blame them for being reluctant to market milk.  But we’d advise dairy producers to err on the side of caution and buy reasonable puts on unsold milk for the balance of 2010 as protection against a worst-case scenario.  We are holding off on 2011, but over the next three months producers should begin to plan for 2011. Call us if you need help.

It is a busy government report week:  Milk Production, Livestock Dairy Poultry, Cold Storage and Livestock Slaughter reports all provide data for the dairy industry to chew on. The June Milk Production Report will be released at 2PM CT today. We are looking for production to come in around 1.3 percent higher with milk per cow figures up 2.6 percent higher than June 2009 and slight increases in month-to-month cow numbers.   

Olam International Ltd, the Singapore-based international commodity trading firm, is looking to buy the outstanding shares for NZ Farming Systems Uruguay Ltd to add dairy supply for its trading operations and to try and capture a piece of the growing dairy industry in Latin America.  

Grains finished 6 to 7 cents per bushel lower overnight and we suspect they’re poised to trade as much as 10 cents per bushel lower to start the day session.  We are in the throws of a weather market and weather markets tend to bring out the speculative traders in everyone. It is much more fun to buy low and sell high than to just sit on your hands or sell a “weather” rally (if you raise corn or soybeans).  But classic weather-related rallies tend to come to a close far before people expect that they will. 

Russian drought and hot Midwest weather were all question marks that propelled corn prices higher last week. End-users of corn may have been prompted to buy corn last week as the trade talk turned more and more bullish.  As prices ascend, however, we expect those users – including dairymen - will become choosy about how much they are willing to pay for poor quality old crop corn with a higher quality new crop on the way earlier than last year. Even with the weakness overnight, this latest rally looks like an opportune time for corn farmers to sell the balance of their 2010 crop and make some sales into 2011.  This doesn’t look like the time to get nervous and make long term purchases for the dairy.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010136.pdf

7/16  Class III Futures:   Volume:  625  Open Interest (OI) Change:  +67  Total OI:  27,582

7/16  Class III Options:   Est. Put Volume:  234   Total OI:  19,588   Est. Call Volume:  46  Total OI:  18,257

7/16  Spot Markets:   Block Cheese $1.5750 (UP 1 1/4),  Barrel Cheese $1.5250 (UNCH),  Butter $1.7750 (UNCH),  NFDM: A $1.2175 (UNCH),  X $1.2250 (UNCH)

7/16  Other Dairy Futures Volume:   Butter:  22  Dry Whey:  29   NFDM: 15    Class IV:  2   Cheese:  10

7/16 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.456     UNCH                Vol:    1                    OI Change:  DOWN 1
Aug         $1.587      DOWN .011       Vol:    0                   OI Change:  UNCH
Sep         $1.595      DOWN .019       Vol:    0                   OI Change:  UNCH
Oct          $1.595      DOWN .015       Vol:    0                    OI Change:  UNCH
Nov         $1.58        UNCH                Vol:   0                     OI Change:  UNCH
Dec         $1.58        UNCH                Vol:    0                    OI Change:  UNCH

7/16 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.76     UNCH                Vol:  83                   OI Change:     DOWN 6
Aug         $14.90     DOWN 16          Vol:  181                  OI Change:     DOWN 76
Sep         $14.98     DOWN 20         Vol:  197                  OI Change:     UP 60
Oct          $14.92     DOWN 12          Vol:  30                   OI Change:     UP 21
Nov         $14.68     DOWN 15           Vol:  54                  OI Change:      UP 22
Dec         $14.72     DOWN 11            Vol:  43                 OI Change:      UP 22
Aug-Dec 2010 Avg:  $14.84                                       DOWN 0.15/cwt
Jan-Dec 2011 Avg:  $14.58                                         DOWN 0.03/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.

Source:   FCStone/Downes-O'Neill