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 endured another volatile session as Chicago Mercantile Exchange (CME) spot cheese prices continued its downward trend. As mentioned yesterday, futures opened sharply lower on strong volume in the overnight session with July and August setting new contract lows at $13.05 (-45) and $13.70 (-30), respectively. This appeared to be a trader or two blowing out of long positions as the market rebounded heading into the CME cheese market with most months 5-10 cents lower. Another lower day in the spot cheese market with 10 offers left in both blocks and barrels for the second straight session weighed on futures, pressing them 15-30 cents lower. A higher CME spot butter session and neutral to slightly positive news from Fonterra's Global Dairy Trade auction likely tempered Class III's losses and even managed to bring the fourth quarter higher by the end of the trading day. Overnight, Class III futures are trading 2-15 cents higher on moderate volume.
Looking at the CME spot cheese market, the sellers have regained control of this market in the near term. The $1.50 mark has been tested three times this year and each time has not been able to break through to the upside for very long. The first correction in mid-March sent block prices back down to the mid-$1.20s, the second correction posted a low of $1.3650 on April 20. In this third correction, we expect to see solid support come in at or slightly above $1.40. If we break through that level, the next line of support would be the April 20 low of $1.3650. While cheese market fundamentals appear bearish, we do not expect U.S. prices to get that far out of line with global pricing.
We reported the Fonterra gDT monthly auction figures yesterday as they were released and the SMP and WMP losses did not seem to be as sharp as many had expected. In fact, the anhydrous milkfat (AMF) weighted average auction price posted a 6 percent gain vs. last month. In our opinion, the key figure in this report was the near month price for AMF. We were told that there was not a lot of product offered for immediate/August delivery and that price soared over last month and carried a significant premium to future pricing. The average price of 6,169/metric ton (MT) ($2.80/lb) was 11 percent more than last month and carried nearly a 1,000/MT premium ($0.45/lb) to the Sept.-Nov. delivery average price of $5,190/MT ($2.35/lb). This month's auction carries the message that the world continues to be short of butterfat.