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.

We're beginning to sound like a broken record, but nearly every trading day for the past week has made an effort to compete for the lowest daily Class III futures volume session of 2010.   Yesterday currently claims the award.  CME spot cheese prices remained steady yesterday but even with bids in both blocks and barrels, it was not enough to keep traders from light position consolidation heading into today's Milk Production report and prices settled 2-15 cents lower.   In the overnight session, trading is quiet and we expect a mixed to lower open today as traders shore up positions prior to this afternoon's report.  

Speaking of milk production, economists are forecasting what we believe to be bearish figures.   We are looking for year-over-year gains of nearly 2 percent as optimal milking conditions, improved income over feed margins and high cull prices during the spring flush this year likely kept milk flowing across the country in record numbers.  It is our opinion that the market will have already priced in a 1 percent to 2 percent gain.   Anything below a 1 percent increase will be deemed bullish, anything over 2 percent will likely be perceived bearish.   Cheese prices fell at the end of May into early June when most of the excess milk was being manufactured into cheese and sold on the open market.

CME spot butter prices saw its routine nominal 1/2 cent gain yesterday but a strange thing happened that hasn't occurred since May 25:  A load of butter actually exchanged hands.   There was still a bid at $1.6250 left when the market closed, so sellers did not take an aggressive stance, but that led to a bit more volume in the near futures months.   Butter futures remained steady to 1/2 cent lower on the close with light volume, but that volume was concentrated entirely in June-October.

Dry whey futures saw decent gains on light volume as bids came in across the board and even more aggressively so in 2011.  USDA released their weekly dry whey prices yesterday and prices were steady to just fractionally weaker.   The fact that whey prices are not dropping as most had expected a month ago is bringing buyers back into the market.  Dry whey buyers may also be a bit more aggressive this week as they might be nervous that sell-side liquidity may disappear with the launch of the new cheese futures contract.  

The EU announced yesterday they accepted bids for 11,935 metric tons (26.3 million lbs) of butter at a minimum rate of $4,375 per ton ($1.9845/lb) but rejected bids for 15,513 tons of skim milk powder because offers were too low.   Only 2,000 MT of butter still remain in EU intervention stocks but all 65,000 tons of SMP remain from the EU's original allocation.  

The US Dollar index has followed a trend lower for the bulk of the week.  It appears that without any fresh bad news from Europe this week, currency traders have been quick to sell the safer US Dollar to bet in the energy, equity and grain markets.  Corn futures traded a narrow range finishing Thursday just slightly higher.  Overnight prices traded both sides of unchanged.  

While we are concerned about weather forecasters hot and cold "takes" about how hot and dry the weather can become this summer, we are not in panic mode for current weather is still ideal.  And with each day that passes, we are closer entering the pollination period for corn without worry.  If there is to be a drought develop, it may mean more worry for soybeans than for corn.  Still, it is too early to tell.  And all week it has been too early to remove the risk premium from these grain markets.  We suspect however that a mixed opening this morning will give way to selling pressure as bulls need to be fed bullish news to keep going.  That type of news is in short-supply so far this morning.

Beginning this Sunday evening, the CME will launch Cheddar Cheese futures and options.   If you have questions about this new contract and how it can be used effectively in your hedging arsenal, please give us a call.

6/17  Class III Futures
:   Volume:  221  Open Interest (OI) Change:  +101  Total OI:  28,386
6/17  Class III Options:
  Est. Put Volume:  12   Total OI:  20,865   Est. Call Volume:  187  Total OI:  19,712
6/17  Spot Markets:
  Block Cheese $1.40 (UNCH),  Barrel Cheese $1.3650 (UNCH),  Butter $1.6250 (UP 1/2),  NFDM: A $1.25 (UNCH),  X $1.25 (UNCH)
6/17  Other Dairy Futures Volume:  
Butter:  41   Dry Whey:  15    NFDM:  30    Class IV:  0

6/17 Individual Class III Month Prices, Change, Volume & Open Interest
Jun - $13.62      UNCH             Vol:  23           OI Change:  UNCH
Jul - $13.60       DOWN 2         Vol:  62          OI Change:  UP 23
Aug - $13.95      DOWN 4         Vol:  44         OI Change:  UP 27
Sep - $14.56       DOWN 5         Vol:  29          OI Change:  UP 8
Oct - $14.70       DOWN  6        Vol:  8            OI Change:   UP 8
Jul-Dec 2010 Avg:  $14.34          DOWN 0.06/cwt
Jan-Dec 2011 Avg:  $14.64
        DOWN 0.04/cwt

Source:  FCStone/Downes-O'Neill