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.

2010 Class III futures erased some of the recent corrective losses Thursday after a largely neutral Cold Storage Report released Wednesday afternoon.  While futures showed some buoyancy, prices were only reluctantly moving higher as the CME spot cheese markets remained stable with trades in block cheese yesterday.  The perception by many is that more cheese will show up at the CME over the next few weeks.  Expectations can be wrong or poorly timed or both, and at the end of the day cash prices are what they are right now: stable to firm with no talk in the country of excess fresh cheese inventory.  Class III futures began firming early this morning and look to open steady to 0.15/cwt higher.

Commercial buyers are warming up to a high $1.50 cheese price for all of 2011, but overall budget-setting activity has been relatively light.  OTC swaps and off-the-exchange transactions have garnered some interest of late and there seems to be a healthy mix of buyers looking for perceived value relative to a myriad of economic forecast for next year.  The biggest impediment to commercial buying is that there is no worry for next year.  That may be sound thinking given current supply/demand discussions, but budget-setting action tends to be spurred on by anxiety of higher prices.  That worry is growing, but the disbelief that prices will stay firm for any protracted period of time remains almost palpable.    

The current spot cheese price has largely been driven by increased demand for slightly less fresh product as opposed to anything dealing with the milk supply picture.  That said, the USDA NASS Livestock Slaughter Report was released this morning showing 230,900 head slaughtered in August.  That’s a 3.3 percent decline from last year, but a 2.3 percent increase in culling from July 2010.  It appears as though there may have been some carryover in these numbers from this summer’s CWT herd retirement.  Seasonally, however, slaughter numbers should not decline by much through October.

After a somewhat surprising USDA cold storage number for butter, the CME Spot butter price finished Thursday’s trade unchanged at $2.2250 with a lone bid at that price.   Not unlike cheese, there is a growing concern surrounding how long these prices can stay propped up at this level, especially with cream multiples in the country showing signs of softening.  At some point, fresh milk will move back into the butter churn in lieu of skimming for cream but that date has not yet been set and inventories are running low.  We are in the camp that sees more upside for the CME spot butter price in the coming weeks after this 4-week layover in the low $2.20’s.

Yesterday Informa estimated U.S. corn and soybean crops below USDA estimates by nearly 300m bushels in the case of corn, offset by increased acres for next years corn crop by 2.5 million acres or 90.4 million total.  They see soybean acres down 1.4 million for the 2011 crop, bullish but already in the market.  The grain complex finished mixed yesterday with corn lower and soybeans higher.  Overnight prices were firm and we look for a firm opening to start the session.

9/23  Class III Futures:   Volume:  833  Open Interest (OI) Change:  +244   Total OI:  27,532
9/23  Class III Options:  Est. Put Volume:  568   Total OI:  21,359  Est. Call Volume:  266  Total OI:  17,545
9/23  Spot Markets:   Block Cheese $1.7500 (UNCH),  Barrel Cheese $1.7350 (UNCH),  Butter $2.2250 (UNCH),  NFDM: A $1.23 (UNCH),  X $1.2250 (UNCH)
9/23  Other Dairy Futures Volume:   Butter:  80  Dry Whey:  4  NFDM:  60   Class IV:  0   Cheese:  0   International SMP:  0

9/23 Individual Class III Futures Prices, Change, Volume & Open Interest
Sep          $16.30                 DOWN 1               Vol:   145              OI Change:    UP 83
Oct          $16.47                 UP 12                     Vol:   140              OI Change:    DOWN 10
Nov         $15.80                 UP 8                       Vol:   175              OI Change:    UP 54
Dec          $15.19                  UP 5                       Vol:   130              OI Change:    UP 23
Jan 11    $14.52                 UNCH                    Vol:   45                OI Change:    DOWN 4
Sep-Dec 2010 Avg:  $15.97                   UP $0.06/cwt
Jan-Dec 2011 Avg:  $14.40                    DOWN $0.02/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