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.

Futures traders shrugged off increases in the Chicago Mercantile Exchange spot cheese and butter markets yesterday and finished mixed across all dairy commodities. 

After the CME block/barrel spread settled as wide as 7.5 cents on Tuesday, barrel buyers narrowed that spread to 4.25 cents yesterday on aggressive bidding. Though futures volume has been weaker this week than the first two of July, we are encouraged to see additional Class III futures and options liquidity building in 2011, cheese futures trading as far out as June 2011 yesterday and another small Class IV option trade occurring in September.

Also, NFDM futures have quietly built its open interest to record levels prior to June’s expiration and have had at least one contract exchange hands for 45 consecutive days.

CME blocks have risen 15 of the last 16 trading sessions and crossed the $1.60 mark yesterday on extremely light volume for the month. In July, only two blocks and one barrel load have traded at the CME.  Where has the volume gone?  

Since the cheese price rally began at the end of June, bulk sales in July have actually been holding firm. During the first two weeks of NASS reporting in July, block cheese sales are up 7 percent vs. 2009 and nearly 18 percent higher than 2008. Barrel cheese sales trailed slightly below 2009 during the same timeframe (down 1 percent) but up nearly 38 percent over 2008. Butter sales have also been firm during the first two weeks in July, up 53 percent over 2009 and up nearly 8 percent against 2008 volume. We will watch these volumes closely over the next few weeks to determine if higher prices end up curbing cheese and butter demand. 

Overnight trading is actually the story of the day with Class III futures volume near 150 contracts so far this morning and futures prices 3-17 cents higher. Based on current CME spot market prices and current dry whey futures, August Class III spot pricing is at $15.07 and the market is likely reflecting those prices in this morning’s trade.  

We look for cheese buyers to continue to inch CME spot prices higher until we find a seller but we aren’t convinced that the market will simply roll over once the sellers return. We suspect that buyers will continue to acquire product through the exchange over the next few weeks. Futures traders continue to eye the spot market for direction.

Also providing more fundamental data to the marketplace will be the June Cold Storage report released this afternoon at 2 p.m. Central Time. We are expecting June butter stocks to be down over 20 percent vs. a year ago, American and total cheese in the plus 4 to 5 percent range. We will provide analysis of that report after it is released today.

Reports of strong cream demand in 2010 have made it to the mainstream media. TIME Magazine is reporting this month that ice cream industry sales are up this year. 

Corn and soybean traders are studying hourly weather charts for any shift in what looks to be continued hot and wet weather over the next six to 10 days. Wednesday’s bounce in corn was extended overnight as prices rose another 3.5 cents per bushel.

Yesterday, several sources posted that Ukraine’s Ag Minister claims the country will not yet impose grain export limits in the 2010/11 crop year. While we remain bearish of corn prices, we understand that we are still in the throws of a global weather market and traders find that as reason enough to respect levels of support and maintain substantial risk premium.

We expect that one day soon they will collectively “give up the ghost” on the worries that have bolstered corn prices over the past few weeks, but for now we look for a more choppy trade. Look for corn to open 2 to 3 higher and soybeans to open 5 to 7 cents higher.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010139.pdf

7/21  Class III Futures:   Volume:  607  Open Interest (OI) Change:  +146  Total OI:  27,945
7/21  Class III Options:  Est. Put Volume:  235   Total OI:  20,081   Est. Call Volume:  293  Total OI:  18,604
7/21  Spot Markets:   Block Cheese $1.6025 (UP 1/4),  Barrel Cheese $1.56 (UP 3 1/4),  Butter $1.79 (UP 1/2),  NFDM: A $1.2175 (UNCH),  X $1.2250 (UNCH)
7/21  Other Dairy Futures Volume:   Butter:  18  Dry Whey:  9   NFDM: 56    Class IV:  0   Cheese:  25

7/21 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.456     UNCH                Vol:    0                    OI Change:  UNCH
Aug         $1.589      UP .002             Vol:    0                   OI Change:   UNCH
Sep         $1.598      UP .003             Vol:    0                   OI Change:   UNCH
Oct          $1.593      UNCH               Vol:    0                    OI Change:  UNCH
Nov         $1.570      DOWN .006     Vol:    13                   OI Change:  UNCH
Dec         $1.57        DOWN .01         Vol:    7                    OI Change:  UP 4

7/21 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.75     DOWN 2           Vol:  6                     OI Change:      UP 5
Aug         $14.98     UP 5                   Vol:  280                OI Change:      UP 2
Sep         $15.07     UP 7                    Vol:  128                 OI Change:     UP 71
Oct          $14.84     DOWN 1            Vol:  34                   OI Change:     UP 19
Nov         $14.62     DOWN 1            Vol:  39                  OI Change:      UP 17
Dec         $14.56     DOWN 2            Vol:  39                 OI Change:      UP 12
Aug-Dec 2010 Avg:  $14.81                                       UP 0.01/cwt
Jan-Dec 2011 Avg:  $14.58                                        UP 0.02/cwt

This data and these 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