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 futures finished mixed yesterday with a good deal of trading interest (nearly 2/3 of 1,200 contracts exchanged) and price movement again relegated to the 2011 contracts and the deferred 2011 contracts at that.  Open Interest rose across board for next year’s contracts largely on commercial hedging activity.  Meanwhile, the nearby contracts remain at a discount to a steady and quiet CME cheese market.  We suspect a shift of activity back to the nearby contracts should cheese prices maintain their steady posture as traders whittled away at the spread between spot and futures.  Look for a steady to lower opening this morning.

Many customers have inquired as to the direction of the CME spot cheese market.  While we expected to see more of a decline in both, the fact is that they have been stable at current levels.   Given the quiet and cautious and somewhat ambivalent nature of the decline, we suspect that the downside on cheese is limited.  Demand did not fall off a cliff when we moved nearly two months ago.  It has cooled some, but it is not dead.

The same can be said for butter as the price has been stable for the better part of the month.  While we hear of deals going on at lower levels than $2.1850, inventories remain tight for today.  Butter futures are edging slightly ever so cautiously with November now leading the charge having been deeply discounted to spot for some time.  Commercial buyers are becoming more eager to own butter futures in the mid-$1.60’s for all of 2011, which has helped to keep futures firm this week.  Look for a steady to mixed opening for butter.

Speaking of demand, cheese and butter usage posted solid gains in the August Commercial Disappearance released late Tuesday afternoon by the Economic Research Service (ERS).  While American cheese usage was reported up 2.4 percent, the real strength in demand came in the “other than American” segment.  Total Cheese usage surged 6.2 percent for the month or 933.9 million pounds, which is the strongest percentage gain and volume so far this year.  Butter demand also posted a solid gain of 31.7 percent or 142 million pounds.  On the surface this is a large number, but last August found butter disappearance down 27.6 percent versus 2008 – the lowest number since May of 2007.

For the week ending Oct 23, the California weekly weighted average NFDM price was announced at $1.0973, $0.0234 below last week’s figure on over 26 million pounds of volume sold, the largest weekly figure since early May.

Grain prices were firm overnight with corn futures in a full re-test of the futures trading highs posted back on Oct. 11.  Until we move above those highs with some gusto and close with a fresh high price, we can only say the market is “re-testing” the price level and should fade lower within the month’s trading range.  The US dollar, being considerably weaker overnight, is the main driving force as bullish news that is NEW is in short-supply this morning.  But the dollar has also show considerable gains over the past few sessions. 

From a technical perspective the US dollar appears primed from more strength and sooner rather than later.   And this time around there a fundamental reason for further strength: next week’s election.  Will the new Congress appear more fiscally responsible than the last group?  What policy changes will we face after the elections?  Is the world about to become more optimistic about the future of our great country?  To early to tell, but with expectations for a major shift in political leaning forthcoming, we look for more strength in the dollar.

Corn export sales were stronger than expected at 545,000 tons, but only because the expectations have been thrashed about like a ship at sea.  The real story is soybean demand, which hit the high end of expectations by eclipsing the 2 million ton export mark for the second week in a row.  Look for a firm opening to start the day on corn and soybeans.


10/27  Class III Futures:   Volume:  1200  Open Interest (OI) Change:  +327   Total OI:  27,914
10/27  Class III Options:  Est. Put Volume:  524  Total OI:  23,857  Est. Call Volume:  497  Total OI:  19,576
10/27  Spot Markets:   Block Cheese $1.6675 (UNCH),  Barrel Cheese $1.68 (UNCH),  Butter $2.1850 (UNCH),  NFDM: A $1.23 (UNCH),  X $1.2250 (UNCH)
10/27  Other Dairy Futures Volume:   Butter:  55  Dry Whey:  15  NFDM:  7  Class IV:  0   Cheese:  6   International SMP:  0

10/27 Individual Class III Futures Prices, Change, Volume & Open Interest
Oct         $16.88               DOWN 1               Vol:    83              OI Change:     DOWN 15
Nov        $15.87               DOWN 2               Vol:   193             OI Change:     DOWN 7
Dec        $14.89               UNCH                   Vol:   142             OI Change:     UP 38
Jan 11     $14.19               DOWN 1                Vol:   79               OI Change:     UP 48
Feb 11    $14.10               DOWN 1                Vol:   91                OI Change:     UP 24
Mar 11    $14.20              UP 10                      Vol:   107             OI Change:     UP 40
Oct-Dec 2010 Avg:    $15.8                   DOWN 0.01/cwt
Jan-Dec 2011 Avg:     $14.76                 UP 0.09/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