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.

Butter futures may have taken notice of the increases in the auction prices and settled 3/4 to 1 1/2 cents higher yesterday on moderate volume. CME spot butter seems to have found support in the mid-$150s and inched higher on a lone bid. With the strength of world butter prices, we believe it is wise to own a decent portion of your needs through the end of the year.  

USDA will be releasing the April Dairy Products Production report later this afternoon. We are looking for monthly butter production to come in 4 percent lower and NFDM production to be slightly lower than last year. Cheese production is still expected to be strong with American cheese coming in up 1 percent and total cheese up around 3 percent. We'll have these figures for you as soon as they are released.

Corn fell five cents per bushel under near ideal six- to 10-day weather forecasts and some technical pressure. Most weather forecasts calls for warmer than normal with a couple of rain systems crossing the Corn Belt in the next six to 10 days. USDA's weekly Crop Progress report released yesterday provided bearish news with 85 percent of the crop emerged and a 76 percent good/excellent rating, 6 percent above last year and 7 percent above the five year average. Some are concerned about La Nina conditions bringing a hot dry summer, but this week’s expected rain pushes those concerns to the back burner. Meanwhile the price of July corn is butting up against its 8-month low and it looks poised to break through to the downside. We suspect it will sometime this week. If it does, we expect fresh selling to add continued pressure to corn prices. Should this occur, we will again recommend that end-users of corn cover upside price risk by purchasing September call options and potentially new crop December call options.


6/1  Class III Futures:   Volume:  1,456  Open Interest (OI) Change:  +334  Total OI:  31,681
6/1  Class III Options:   Est. Put Volume:  298   Total OI:  23,596   Est. Call Volume:  217  Total OI:  23,587
6/1  Spot Markets:   Block Cheese $1.4375 (DOWN 2 3/4),  Barrel Cheese $1.40 (DOWN 3),  Butter $1.56 (UP 1/4),  NFDM: A $1.30 (UNCH),  X $1.29  (UNCH)
6/1  Other Dairy Futures Volume:   Butter:  70    Dry Whey:  16    NFDM: 3    Class IV:  0

6/1 Individual Class III Month Prices, Change, Volume & Open Interest
Jun - $13.54      DOWN 6        Vol:  282        OI Change:  DOWN 59
Jul - $13.30       DOWN 20        Vol:  496        OI Change:  UP 90
Aug - $13.84     DOWN 16        Vol:  184        OI Change:  UP 99
Sep - $14.45      DOWN 4        Vol:  125        OI Change:  UP 42
Oct - $14.57      UNCH                Vol:  111        OI Change:  UP 38

Jul-Dec Avg:  $14.25                                 DOWN 0.04/cwt

Source:   FCStone/Downes-O'Neill