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.

The first day of 2011 looked a good deal like the last of 2010 in terms of trading volume in Class III.  1,174 contracts traded hands in mostly firm session. But that firming action is deceiving. The lion’s share of the volume – over 800 contracts - was reserved for the January to March 2011 contracts and two-thirds of those futures prices finished modestly lower on the day. The CME spot cheese market did not give the kind of inspiration required to keep those nearby prices moving higher yesterday and we expect more of a sideways trade for cheese today.  When we add it all up, expect that a corrective move lower on futures is near.

No one can argue that there is some weird, violent, dry, and wet, harmful-to-milk-production weather going on around the world lately. But we may have leaned too hard on the flooding in Australia yesterday. Yes the northeastern area of Australia – Queensland -- is experiencing extreme flooding that will wreak havoc on their wheat crop – not to mention fruits and vegetables and anything else grown there. But Queensland is not the major dairy producing region of the country and its overall impact ought to be somewhat limited in terms of damage done to milk production at this time.

The Dairy Products Report, released yesterday morning, was largely bearish for cheese. Plenty of milk went into the cheese vat in November as American cheese production rose 6 percent (890 million pounds) versus our expectations of a 4.4 percent increase. Butter production hit 133 million pounds, which eclipsed our expectations of 125 million pounds and marked the second most butter produced during the month of November. This doesn’t change the tight butter inventory situation we have, of course, but it may serve to bring some butter to Chicago. NFDM production was below our expectations of 7 percent rising only 3.52 percent.

Both butter and nonfat are getting a slow but firm start to the New Year with aggressive bids in both markets yesterday. Commercial buyers have an appetite for not only the product, but the futures prices as they appear to be the primary buyer. But futures volume has been light so far, so this latest rally appears to be fading somewhat. Look for a mixed opening this morning.

Corn futures failed to hold new highs yesterday so a short-term top was set. The extent of which this is perhaps a longer-term top has not been established, but we expect a weaker start to the day. The weather is looking better for Argentina, but rains have not washed the worry away – yet. Last Thursday the Argentine government pegged soybean planting at 83 percent complete. Corn planting hit 87 percent done, while wheat harvest was 75 percent done. Look for corn to open steady to 2 lower and beans to open 2 to 5 higher.  

1/3  Class III Futures
:   Volume:  1,174  Open Interest (OI) Change:  +501   Total OI:  29,250
1/3  Class III Options:  Est. Put Volume:  110  Total OI:  21,441  Est. Call Volume:  225  Total OI:  20,468
1/3  Spot Markets:   Block Cheese $1.3425 (UNCH, 4 Trades); Barrel Cheese $1.3400 (UNCH, 4 Trades)
Butter $1.6900 (UP2, 0 Trades); NFDM: A $1.2700 (UNCH, 0 Trades), X $1.2250 (UNCH, 0 Trades)
1/3  Other Dairy Futures Volume:   Butter:  16  Dry Whey:  16   NFDM:  3  Class IV:  12   Cheese: 3  International SMP:  0

1/3 Individual Class III Futures Prices, Change, Volume & Open Interest
Jan 11     $13.19                DOWN 3               Vol:   194              OI Change:     UP 86
Feb 11     $13.65                 DOWN 7               Vol:   341             OI Change:     UP 217
Mar 11    $14.08                UP 2                      Vol:   269             OI Change:      UP 90
Apr 11     $14.60                UP 5                      Vol:   72                OI Change:      UP 15
Jan-June 2011 Avg:     $14.23               UP $0.02/cwt
July-Dec 2011 Avg:      $15.64              UP $0.05/cwt
Jan-Dec 2011 Avg:       $14.94               UP $0.04/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