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.

Class III Milk futures finished mixed on light to moderate volume as traders consolidated their positions heading into the three day holiday weekend.   CME Block cheese prices did manage to post a 2 ½ cent gain on bids only, but barrel prices held steady and traders could not get excited about another push to the upside.   We were impressed with August futures hanging on to slight gains during Friday’s session – the premium being carried to CME spot cheese remains at nearly 10 cents/pound.  Overnight, Class III futures are trading unchanged to eight cents higher on light volume and we expect some follow through buying as commodities in general are firm this morning.

In Chicago and likely in many cities across the country, pools and beaches were crowded as temperatures soared.  The East Coast is being impacted the most as record high temperatures are possible today and tomorrow as far south as Tennessee and as far north as Vermont.   New York City is set to take out the 100 degree mark today, a feat only seen once since 2000.   Upper 90s are to remain in much of the East Coast over the next few days.   While this will likely have some impact on milk production on the East Coast, ice cream demand may also spike as a result.  Summer heat is also impacting the lower Midwestern states and in dairy areas including California, Washington, Idaho and Arizona.   Temps are fairly normal in Texas/New Mexico as well as the Upper Midwest including Minnesota and Wisconsin.

Butter prices held steady on Friday and futures were quiet and mixed.  Even with the weekend heat, butter futures are trading unchanged to a penny lower on light volume.   Dry whey futures came off ¼ cent to 2 cents on Friday as traders try and test the premium that was put into the market over the past couple of weeks.   The first half 2011 dry whey futures average is now $0.3275, down from $0.3500 from the previous Friday.   NFDM futures were quiet on Friday with September trading a penny lower to $1.15/pound.

In what has been called by the media a “patriotic protest,” dairy farmers in New York and potentially other states dumped their milk on July 4 to protest low prices and send a message to lawmakers.   While milk dumping has been talked about since prices collapsed at the beginning of 2009, we have not seen any of these movements gain any traction.   We were impressed with the coverage that Dave and Robin Fitch from West Winfield, NY received with national coverage on Dairyline Radio, popular dairy blog “Cows and Crops”, and other TV, radio & newspaper outlets across the country.   If any dairymen that read our daily email participated in this milk dump protest, please let us know.   

Last weekend ended by the corn market removing 7 trading days worth of losses and fresh low prices in just two days on the heels of surprising USDA Reports.  Users of corn suddenly found themselves way too short of inventory and needed to buy corn.  Their buying combined with speculative short covering and new speculative buying spurred the corn market back up very near its June high.

Dave drove to Wisconsin for the weekend and said corn in Northern Illinois and Southern Wisconsin was shoulder high.  We know that there is more to the crop than can be seen by the highway, but fields appear better than normal.  The weather forecast is for good corn growing weather and traders will likely conclude that there is a good corn crop on the way.  Given the fickle nature of USDA reports and the continued good weather, we are highly skeptical as to whether or not this rally has enough gusto to eclipse the $4.00/bu mark.  We’re calling for a 3 to 5 cent higher open on follow-through from the overnight session, but suspect that the rally is running out of steam.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010127.pdf

7/2  Class III Futures:   Volume:  815  Open Interest (OI) Change:  -412 (+249 w/o June)  Total OI:  29,561

7/2  Class III Options:   Est. Put Volume:  100   Total OI:  18,342   Est. Call Volume:  217  Total OI:  16,972

7/2  Spot Markets:   Block Cheese $1.4550 (UP 2 1/2),  Barrel Cheese $1.40 (UNCH),  Butter $1.75 (UNCH),  NFDM: A $1.2300 (UNCH),  X $1.2450  (UNCH)

7/2  Other Dairy Futures Volume:   Butter:  17   Dry Whey:  80   NFDM: 18    Class IV:  0   CHEESE:  2

7/2 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.43      UNCH                   Vol:   0                      OI Change:  UNCH
Aug         $1.526     UP .009                 Vol:    1                     OI Change:  UP 1
Sep         $1.581     UP .015                  Vol:   0                     OI Change:  UNCH
Oct          $1.583     UP .007                 Vol:  0                     OI Change:  UNCH
Nov         $1.562     UP .002                 Vol:  0                    OI Change:  UNCH
Dec         $1.566     UP .021                  Vol:   1                    OI Change:  UP 1

7/2 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.45     DOWN 5              Vol:  61                 OI Change:    DOWN 10
Aug         $14.36    UP 2                       Vol:  361               OI Change:   UP 103
Sep         $14.82    DOWN 5                Vol:  155               OI Change:   UP 49
Oct          $14.86    UP 1                        Vol:  90                 OI Change:  UP 32
Nov         $14.72    UP 8                       Vol:  34                 OI Change:  UP 27
Dec         $14.59    UP 4                       Vol:  22                 OI Change:  UP 4
Jul-Dec 2010 Avg:  $14.47                                           UP 0.01/cwt
Jan-Dec 2011 Avg:  $14.52                                           NO CHANGE

Source:   FCStone/Downes-O'Neill