Butter prices continue to gain

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 futures settled yesterday on light volume as lack of fresh news convinces traders to move prices in one direction or the other. CME spot cheese did manage to gain a ½ penny in both blocks and barrels but futures traders did not show much enthusiasm.  Overnight trading is light and mixed and unless we get a big surprise from the CME spot market over the next couple of days, we expect a quiet but firm trade to close out the week.

Another potential reason for the light volume yesterday is that the Idaho Milk Processors Annual Conference begins today in Sun Valley and many of the top industry players from around the country attend this important meeting.  Dave has been in Idaho all week and will be in attendance – we look forward to hearing from him to get a feel of market conditions during his conversations with the industry’s elite.

CME spot butter prices continued their impressive gains yesterday easily surpassing $1.90 to settle at $1.9175.  We have commented enough about the tightness of butterfat and cream in the country, but cream multiples remain extremely high and yesterday’s weekly USDA commentary suggest that ‘manufacturers and handlers are questioning how much above $2.00/lb the price will go’. We rarely comment on the USDA’s weekly butter stocks report but for the week ending Aug 9, 9.07 million pounds were in USDA selected warehouses.  This is the lowest August storage figure since 1998.  August 1998’s monthly CME butter price average was $2.1730. September 1998’s average price was $2.7566. We don’t believe that butter demand is strong enough to get prices up to September 1998 levels, but we do believe that $2.00 is a very realistic target given the current supply/demand situation.

After the CME launched International Skimmed Milk Powder (ISM) futures contract on May 24, 2010, not a single trade has occurred - until yesterday.  One September ISM futures contact traded at $2,780/MT ($1.2610/lb) at 2:30AM during yesterday’s overnight session.  ISM is the first exchange-listed dairy contract with physical delivery points located around the world.  We will start to keep an eye on this contract for more activity.

USDA released the World Ag Supply/Demand Estimates this morning and appears slightly bearish on the surface for US corn and soybeans, but this data might be moot for the time being as traders focus on the global wheat stocks.  USDA predicts this year’s US corn crop at 13.365 billion bushels, with yield at 165 bu/acre and a carryout estimate at 1.312 bln/bu, all slightly above the consensus estimates.   Soybeans are projected at 3.433 billion bushels with yield at 44 bu/acre and a carryout of 260 million bushels. However, global wheat stocks are estimated at 174.76 million metric tons, down 9.9 percent from last month’s estimate.  We look for wheat to open 15-20 higher, soybeans 8-10 higher and corn 5-7 cents higher as a result of this report. As we like to remind our readers, it is more important how a market closes than opens on a day like today.  The wheat market has been extremely volatile over the past two weeks as a result of the Russian drought, but information is unclear as to what kind of damage has been done thus far. Look for a volatile and choppy trade today.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010154.pdf

8/11  Class III Futures:   Volume:  692  Open Interest (OI) Change:  +48  Total OI:  25,438

8/11  Class III Options:  Est. Put Volume:  502   Total OI:  19,520   Est. Call Volume:  99  Total OI:  17,456
8/11  Spot Markets:   Block Cheese $1.62 (UP 1/2),  Barrel Cheese $1.5850 (UP 1/2),  Butter $1.9175 (UP 2),  NFDM: A $1.21 (UNCH),  X $1.2250 (UNCH)

8/11  Other Dairy Futures Volume:   Butter:  153  Dry Whey:  3   NFDM:  26   Class IV:  9   Cheese:  4    International SMP:  1

8/11 Individual Class III Futures Prices, Change, Volume & Open Interest
Aug         $15.07                UP 1                           Vol:  114              OI Change:    DOWN 15
Sep          $15.55                UP 4                          Vol:  234             OI Change:    DOWN 41
Oct          $15.16                 UP 3                         Vol:  140               OI Change:    UP 30
Nov         $14.87                UP 3                          Vol:  20                OI Change:    DOWN 3
Dec          $14.72                UNCH                      Vol:  18                OI Change:    DOWN 1
Aug-Dec 2010 Avg:  $15.07                    UP 0.02/cwt
Jan-Dec 2011 Avg:  $14.60                    DOWN 0.01/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

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