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.

After a fairly strong start to the month where Class III milk futures volume was 1,000-plus for six of the first seven trading days of July, yesterday was a setback. Futures volume barely eclipsed the 400-contract barrier, and it took until after the pit session closed to see the first trade in November where only three contracts exchanged hands all day.  

Block cheese prices were stagnant at the Chicago Mercantile Exchange for the first time in 10 trading sessions, though barrels did manage to gain 0.5 cents on zero trades. There is little planned fundamental news for the dairy markets to absorb this week so the focus will likely be more acutely directed towards spot market activity. We look for a higher opening this morning.
 
The more important point is not what little trading activity we saw yesterday, but the minimal negative price reaction that Class III futures had yesterday. 

It is a common trading mantra that bull markets must be fed bullish news or prices fizzle, correct or end. Last Friday, sellers were dominant in futures after a lone trade occurred in the spot block and barrel markets, even though bids continued pushing up the price. Yesterday, CME block cheese prices failed to continue its nine day rally, a perfect set up for traders to take profits or at least test the resolve of futures buyers. But a sell-off didn’t even occur intraday after the spot trade. 

While general market sentiment is skeptical of higher cheese prices, it is this failure of the sellers to test the market’s resolve on a day with little bullish news that lead us to believe the buyers are in control of this market and futures are poised to make new highs in the coming days.
 
CME spot butter remained quiet and without a bid at or underneath the market yesterday. Futures were quiet until later in the day when buying came in and pushed futures higher August-November. Even after the pit settlement at 1:10 p.m., traders pushed futures one to two cents higher than settlement prices in the afternoon session on strong volume. CME weekly butterstocks released yesterday afternoon showed a continued seasonal drawdown but at a slower rate than the previous week. For the week ending July 10, 49.74 million pounds of butter were in storage, down 1.2 million from the previous week (2.4 percent). Year-to-date, butter in CME approved warehouses is down 50.7 percent from last year.
 
Export figures were released for May yesterday afternoon and remain strong across all dairy commodities. We will release a detailed report with those figures later this morning.

Corn prices remained range-bound yesterday as market bulls continue to eye the $4 per bushel mark in December and the bears continue to eye 6-foot-high corn in the fields and milder six to 10 day weather models. Weather is critical now and with each day that passes the prospect of weather related crop problems diminishes. End-users are not out of the woods yet, but we recommend you remain on the sidelines hedging feed needs for now.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010133.pdf

7/13 Class III Futures:   Volume:  419  Open Interest (OI) Change:  +106  Total OI:  26,760
7/13 Class III Options:   Est. Put Volume:  139   Total OI:  19,063   Est. Call Volume:  217  Total OI:  17,724
7/13 Spot Markets:   Block Cheese $1.54 (UP 1 1/4),  Barrel Cheese $1.51 (UP 1),  Butter $1.77 (UP  3/4),  NFDM: A $1.21 (UNCH),  X $1.23  (UNCH)
7/13 Other Dairy Futures Volume:   Butter:  102  Dry Whey:  4   NFDM: 5    Class IV:  0   Cheese:  0

7/13 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.456    UP .001                Vol:    0                    OI Change:  UNCH
Aug         $1.575      UNCH                  Vol:    0                   OI Change:  UNCH
Sep         $1.604    UNCH                 Vol:    0                     OI Change:  UNCH
Oct          $1.60       UNCH                 Vol:    0                    OI Change:  UNCH
Nov         $1.57       UNCH                  Vol:   0                     OI Change:  UNCH
Dec         $1.57       UNCH                 Vol:    0                     OI Change:  UNCH

7/13 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.73     DOWN 4             Vol:  105                 OI Change:     UP 48
Aug         $14.74     DOWN 4             Vol:  140                 OI Change:     UP 13
Sep         $15.00     UNCH                  Vol:  67                  OI Change:     DOWN 5
Oct          $14.89     DOWN 1              Vol:  41                  OI Change:     UP 17
Nov         $14.75      UNCH                 Vol:  3                    OI Change:      UP 1
Dec         $14.64     UP 1                      Vol:  10                  OI Change:      UP 8
Aug-Dec 2010 Avg:  $14.80                                        DOWN 0.01/cwt
Jan-Dec 2011 Avg:  $14.56                                         UP 0.01/cwt

Source:   FCStone/Downes-O'Neill