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

U.S. markets were closed Monday to honor the life of an American icon, Dr. Martin Luther King, Jr. Dr. King became a symbol for overcoming adversity and the youngest person to receive the Nobel Peace Prize for his work to end racial segregation and discrimination through nonviolent means. On April 4, 1968, Dr. Martin Luther King, Jr. was assassinated in Memphis, Tenn., a tragic end to an incredible story.

News over the weekend was relatively quiet in the U.S., but world weather uncertainties garnered most headlines. Much of the price strength here in the U.S. can be attributed to world market strength. To combat inflation, China’s central bank said it would raise the amount of money that lenders must keep in reserve by 50 basis points on Jan. 20, the latest in a series of hikes aimed at reining in prices. While it provided some pressure to overseas markets yesterday, most commodity prices are higher this morning - including milk.

To give us more insight, Fonterra’s Global Dairy Trade (gDT) is slated to be released this morning. After the strength reported back on Jan. 4 (the last day auction results were posted) expectations are for more volume and higher prices once again. But after reading this article, we’re cautious to lean too hard. Also, USDA International Prices are to be released this week Thursday.

Strength in CME NFDM may have lent a bullish hand to Class III Friday as both Grade A and Extra Grade NFDM prices traded to $1.4325 and $1.40, respectively. NFDM futures rallied throughout 2011 and pushed as high as five cents higher (limit bid). Enthusiasm – or worry – spread into the Class III market as large, late-day buy orders offered a final boost to prices going into the long weekend. Look for follow-through buying this morning.

From a technical standpoint, the dairy complex is trending higher. And every day there is new money entering a largely rising market as Open Interest in Class III, for example, is up 1,625 contracts – or just over 5 percent of total Open Interest – since last Monday. From a fundamental standpoint, it appears as though the market is clawing up a wall of worry as Class III prices remain at a substantial premium to the CME spot markets. While the butter/powder prices yank Class III higher, however, we expect to see more cheese make its way to the exchange this week and we still expect a price correction from these levels.

Late weather problems and margin compression felt on U.S. dairies over the past two years has not put a crimp in milk production just yet. The USDA will release the December Milk Production Report at 2 p.m. central tomorrow. Our economist, Bill Brooks, is expecting U.S. production to come in up 2.6 percent, while 23-state production is expected at 3.1 percent.

Corn marched higher overnight in the face of monetary tightening talk out of China and beneficial rains in Argentina. Those rains, however, kept a lid on soybean prices overnight, which are trading mixed this morning. Meanwhile, who hasn’t gotten the signal that grain supplies will be very tight and prices high for the foreseeable future? Users are figuring out how to get by with less and farmers are figuring out how to produce more. In the past, that has led to lower prices sooner than anybody figured. Will this time be different? Look for corn to open 5 to 7 cents higher, soybeans are called mixed.


1/14 Class III Futures: Volume: 1,995 Open Interest (OI) Change: +647 Total OI: 33,316

1/14 Class III Options: Est. Put Volume: 1139 Total OI: 24,902 Est. Call Volume: 676 Total OI: 23,331

1/14 Spot Markets: Block Cheese $1.5250 (UP 1 1/2, 0 Trades); Barrel Cheese $1.4750 (UP 1 1/4, 6 Trades)

Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.4325 (UP 3 3/4, 4 Trades), X $1.4000 (UP 3, 0 Trades)

1/14 Other Dairy Futures Volume: Butter: 37 Dry Whey: 21 NFDM: 25 Class IV: 38 Cheese: 2 International SMP: 0

1/14 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11           $13.51           DOWN 4          Vol: 125     OI Change:     DOWN 25

Feb 11          $15.00          UP 9                  Vol: 422      OI Change:     UP 65

Mar 11         $15.13           UP 21               Vol: 460      OI Change:      UP 121

Apr 11         $15.45            UP 13               Vol: 139     OI Change:      UP 38

Jan-June 2011                  Avg: $15.10                           UP 0.15/cwt

July-Dec 2011                 Avg: $16.13                            UP $0.21/cwt

Jan-Dec 2011                  Avg: $15.61                            UP 0.16/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.