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.

Sharp selling in front month Class III futures was the opening story of Friday’s trade setting new contract lows Dec-Mar in early trading as worry flooded capital markets leading to heavy liquidation in all commodities Friday.   China announced an increase in their benchmark interest rates for the first time since 2007 and that may have spilled over into the dairy markets early in trading.  The first increase in CME spot block prices since Nov. 6, however, buoyed milk futures off their lows on strong volume.   CME spot barrel prices did fall to $1.37 on 12 loads traded which brought the block/barrel spread back to its normal pattern.  

Last week’s CME block cheese average came in at $1.4040/lb, the lowest price level since the week ending June 26 and $0.3625 cents lower than the annual high set five weeks ago (Oct 9).   With CME spot block price settling above the weekly average, we expect an increase in orders from patient buyers who need to refill the pipeline for the holidays/Super Bowl promotions.   Sellers may continue to be aggressive at these levels but new buyers have stepped to the plate wanting to own product at these price levels over the past week and we do not see them disappearing over the next few weeks.   Look for support in CME spot cheese and futures prices this week as buyers seek product at a value price.

Four different sellers were looking to unload product in the CME spot butter market Friday and dropping the price to $1.99 did not find any takers.   As a result, butter futures were under assault in the first quarter 2011, down five and four cents, respectively, in Jan & Feb on moderate volume.   Open interest was only slightly higher suggesting there may have been some traders heading for the exits in anticipation of a sharp decline.  History suggests that when butter prices finally decline after a move over $2.00/lb, it does so in grand fashion.  But with the global markets still tight on butterfat, we could see prices elevated for the foreseeable future.

Dry whey futures continue to post gains on relatively strong volume in that complex.   The market is seeing good two-sided trading as whey users lock in price contracts for next year and cheese hedgers on the opposite side.  A slight cost of carry now exists in the dry whey futures curve through second quarter 2011.   We are hearing reports of prices easing a bit in Europe and this may provide the US market with some price resistance at current levels, but we remain bullish whey and whey protein prices into 2011.

The mid-November Fonterra Global Dairy Trade auction prices tomorrow and the October Milk Production report on Thursday.

After being repeatedly attacked by negative media stories and editorials over the past week, Dairy Management Inc issued a press release to “set the record straight” about the relationship between DMI and USDA.  We’d like to advise DMI and all other state dairy marketing agencies to take a lesson from the California Milk Advisory Board that continues to put out successful and thoughtful advertising and PR campaigns to promote the dairy industry.  We applaud their latest Real California Dairy Families ad campaign that provides US consumers with a personal connection to those that produce the nation’s milk. 

After Tuesday’s key reversals and continued follow through on Wednesday, and Thursday, technical traders and new longs hit stop orders resting beneath the market in corn, soybeans and wheat as they ran for the door.  Limit down in corn and soybeans on Friday and we think more to go.  Other commodities such as sugar have also seen major declines, creating a downdraft of bearish signals from which the grains will likely follow.  

Meanwhile, the US dollar is doing what most traders did not expect: it’s going up.  This may be a change in trend for the dollar or it may be a bounce in the bear market (bear bounces tend to be vicious moves to the upside).  Either way, a strong dollar is forging a nasty headwind for the grains.  Look for corn and beans to open firm in line with the overnight trade.


11/12 Class III Futures:   Volume:  1,784  Open Interest (OI) Change:  +548   Total OI:  27,347
11/12  Class III Options:  Est. Put Volume:  379  Total OI:  21,952  Est. Call Volume:  286  Total OI:  19,594
11/12  Spot Markets:   Block Cheese $1.41 (UP 1), Barrel Cheese $1.37 (DOWN 2 1/4), Butter $1.99 (DOWN 1), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
11/12  Other Dairy Futures Volume:   Butter:  58  Dry Whey:  49  NFDM:  28  Class IV:  0   Cheese:  27   International SMP:  0

11/12 Individual Class III Futures Prices, Change, Volume & Open Interest
Nov        $15.43                UNCH                 Vol:   119             OI Change:     UP 15
Dec        $13.26                DOWN 2             Vol:   346           OI Change:     UP 45
Jan 11     $13.38                DOWN 7             Vol:   383           OI Change:     UP 79
Feb 11    $13.52                 DOWN 6            Vol:   151             OI Change:     UP 56
Mar 11   $13.72                  DOWN 6            Vol:   126            OI Change:     UP 40
Jan-June 2011 Avg:     $13.83             DOWN 0.06/cwt
July-Dec 2011 Avg:      $15.23              NO CHANGE

Jan-Dec 2011 Avg:       $14.53              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