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 milk futures continued its rally into the third straight session yesterday as CME spot cheese continued nudging higher without a seller in sight.  Yesterday’s spot market activity was tempered, with only two buyers in blocks and two in barrels looking for product.   Milk futures are running sharply ahead of the CME spot market as August milk is pricing near the $1.53 mark and spot cheese is somewhere 11 cents below that mark.   However, the recent volume and aggressiveness of futures traders in the August and September contract lead us to believe that spot prices will continue to firm today and into next week.   Overnight, Class III futures opened lower on light volume but buyers have since re-entered the market to push prices into the black.  Expect a firm market today heading into spot cheese.

USDA released their weekly dairy cow slaughter figures yesterday afternoon.  For the week ending June 19, 49,900 head were sent to slaughter, down 19.6 percent vs. the corresponding week in 2009 (due to CWT’s 2009 herd retirement program) but 18 percent ahead 2008’s figure.   We suspect there has been some reluctance to cull by producers during the most recent CWT bid period.

California’s weekly weighted average NFDM price (CWAP) dropped sharply last week, down 9 ¼ cents to $1.1963 on the strongest volume since the week ending May 14.  NFDM futures have been in decline all week and we expect CME spot prices to also continue their decline to get in better line with the country.    July-Dec 2010 futures currently average just over $1.16/lb and while there may still be some short term weakness ahead, we do expect buyers to see this as an opportunity to add to their coverage levels, even in to the first half of 2011.

Weekly dry whey prices were released by the USDA yesterday and while mentioning a weak undertone in both the Central & Western comments, prices remained unchanged at $0.3450 in the Central and down just an 1/8 penny to $0.38625 in the West.   Dry whey futures saw slight gains in the near months and around a penny decline Apr-Oct 2011.

The USDA May Dairy Products Report arrived very close to expectations.   With a quick glance at the report yesterday, we noted that cheese looked slightly bullish vs. expectations and butter and NFDM neutral.  There are still a number of bearish fundamental factors that lead us to believe that $1.80 cheese is likely not in the near to medium term future, but there were two key revisions listed from the April report that we did not mention in yesterday’s recap.   April American Cheese production was revised 1.8 million pounds lower and butter production was revised 5.7 million pounds lower.   And this report showed that American cheese production is slowing vs. last year and cheddar cheese production actually turned negative.   Since the industry prices nearly all cheese off the CME spot market – which is cheddar only – we believe the results of this report were slightly bullish.

It has been a wild ride for corn prices this week to say the least.  We expect that this most recent two-day rally will end just as sharply as it began as traders come to realize that the USDA report of mid-week is not necessarily a game changer.  We ought to get a better read on market sentiment, however, after the long holiday weekend.   Look for a weaker opening this morning.


7/1  Class III Futures:   Volume:  1285  Open Interest (OI) Change:  +120  Total OI:  29,973

7/1  Class III Options:   Est. Put Volume:  327   Total OI:  21,699   Est. Call Volume:  192  Total OI:  20,885

7/1  Spot Markets:   Block Cheese $1.43 (UP 1),  Barrel Cheese $1.40 (UP 1/4),  Butter $1.75 (UNCH),  NFDM: A $1.2300 (UNCH),  X $1.2450  (UNCH)

7/1  Other Dairy Futures Volume:   Butter:  34   Dry Whey:  16   NFDM: 27    Class IV:  0   CHEESE:  10

7/1 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.43      UNCH                  Vol:  0                      OI Change:  UNCH
Aug         $1.517     UP .021                 Vol:  0                     OI Change:  UNCH
Sep         $1.566    UP .004                 Vol:  5                     OI Change:  UP 1
Oct          $1.576     UP .008                 Vol:  5                     OI Change:  UP 4
Nov         $1.56       UNCH                    Vol:  0                    OI Change:  UNCH
Dec         $1.545     UNCH                    Vol:  0                    OI Change:  UNCH

7/1 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.51     UP 1                       Vol:  109                 OI Change:  DOWN 22
Aug         $14.34    UP 21                     Vol:  522               OI Change:   DOWN 52
Sep         $14.87    UP 11                      Vol:  215                OI Change:  UP 39
Oct          $14.85    UP 7                       Vol:  93                 OI Change:  UP 3
Nov         $14.65    UNCH                    Vol:  95                 OI Change:  UP 30
Jul-Dec 2010 Avg:  $14.46                                           UP 0.06/cwt
Jan-Dec 2011 Avg:  $14.52                                            UP 0.01/cwt

CLASS III:  $13.62
CLASS IV:  $15.45

Source:   FCStone/Downes-O'Neill