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.

CME Block and Barrel cheese prices extended its rally yesterday as blocks reached and surpassed the 2010 high of $1.5150 set in late January. Multiple buyers were aggressively seeking product but for the seventh straight trading session, sellers were completely absent from the marketplace. Spotty reports of fresh cheese getting a bit harder to come by in Idaho and in the Midwest due to less milk and stronger short-term demand are beginning to surface. Extremely hot weather in the lower Midwest and the entire East Coast are also hurting milk production in those areas.  We expect cheese buyers to remain aggressive in looking to acquire product in the spot market today.

Class III milk futures were tempered yesterday in its reaction to the strong cheese prices, but were still well supported into the first half of 2011. Prior to yesterday, Class III milk and cheese futures had been carrying an exceptionally strong premium to the cash market. Yesterday’s spot cheese market activity confirmed that the premium was justified, but was unwilling to keep that large of a gap. Futures traders respected the move but will wait for more information to justify even higher prices. It is our belief that the cash market still has more room to run to the upside and futures will follow.

Dry whey futures were extremely quiet yesterday but posted slight gains Aug-Dec 2010. The first half 2011 dry whey futures price average has been on a roller coaster ride over the past month, starting as low as $0.28 in mid-June and sharply increasing to over $0.35 on June 24 before falling back over four cents to settle at $0.31 yesterday. Yesterday, USDA announced its mostly prices which were only fractionally lower in the Midwest ($0.3425 – down ¼ penny) and unchanged in the West ($0.38625).  

CME spot butter markets were quiet yesterday but with bids still standing strong at $1.75. Futures prices were mixed yesterday but the bulk of the trading came during the afternoon session as buyers lifted offers Sep-Dec 2010. While this market has been fairly quiet all week, fundamentals still point to higher butter prices in the short term.

NFDM futures prices saw slight gains yesterday on light volume, and while the fundamental news for this commodity have been bearish in the short-term, we may be fishing for a bottom in the low $1.10s.  August and September futures prices settled at $1.17 yesterday, though Jan-Mar 2011 did drop 1-2 cents to finish with a $1.15 average. International prices released by the USDA yesterday morning showed price declines in Oceania reflecting the results of  the Global Dairy Trade auction earlier in the week, but European prices did not show similar price declines and this might be seen as a bit supportive.  

USDA released its weekly dairy cow slaughter report yesterday afternoon showing year-over-year declines. For the week ending June 26, 47,400 head were sent to slaughter, down nearly 15 percent from the corresponding week last year. Due to CWT removals last year, we’ve also been comparing 2010 weekly slaughter to 2008 numbers and against two years ago, slaughter is up 10 percent.  Year to date, dairy cow slaughter is down 5.1 percent from 2009.

Corn traded mixed overnight in quiet anticipation of this morning’s release of the USDA Crop Report.  According to the report, both the 2009-10 and 2010-11 carryout numbers were well within the range of pre-report expectations for corn, soybeans and wheat, but slightly higher than the average range of expectations.  As such, we are calling this report “slightly bearish” for the grain complex and look for a 1 to 2 lower opening for corn and 2 to 4 lower soybean opening this morning.  

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010130.pdf

7/8  Class III Futures:   Volume:  1138  Open Interest (OI) Change:  +285  Total OI:  26,276

7/8  Class III Options:   Est. Put Volume:  237   Total OI:  18,767   Est. Call Volume:  221  Total OI:  17,393

7/8  Spot Markets:   Block Cheese $1.52 (UP 4),  Barrel Cheese $1.50 (UP 3 3/4),  Butter $1.75 (UNCH),  NFDM: A $1.21 (UNCH),  X $1.23  (UNCH)

7/8  Other Dairy Futures Volume:   Butter:  58   Dry Whey:  4   NFDM: 17    Class IV:  0   CHEESE:  12

7/8 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.432    UP .002                Vol:    0                      OI Change:  UNCH
Aug         $1.566     UP .016                 Vol:    4                     OI Change:  UP 3
Sep         $1.595      DOWN .005        Vol:    8                     OI Change:  UNCH
Oct          $1.606     UP .019                 Vol:   0                     OI Change:  UNCH
Nov         $1.569     UNCH                  Vol:    0                     OI Change:  UNCH
Dec         $1.568      UP .002                Vol:   0                    OI Change:  UNCH

7/8 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.56    UP 6                     Vol:  59                  OI Change:    UP 37
Aug         $14.66    UP 2                      Vol:  375                OI Change:    DOWN 23
Sep         $15.00    UNCH                   Vol:  172                OI Change:   UP 36
Oct          $15.00    UNCH                   Vol:  108               OI Change:   UP 6
Nov         $14.73    UP 1                       Vol:  53                 OI Change:   DOWN 7
Dec         $14.70    UP 1                       Vol:  40                 OI Change:   UP 2
Aug-Dec 2010 Avg:  $14.82                                          UP 0.01/cwt
Jan-Dec 2011 Avg:  $14.58                                            UP 0.02/cwt

Source:   FCStone/Downes-O'Neill