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.

Growing class III futures and options volume and a solid jump in open interest was the hallmark of yesterday’s Class III trade.  1,425 contracts exchanged hands and open interest increased by 606 contracts while traders wrestled with an expectation of weaker spot cheese prices on one hand and strong dry whey futures prices on the other.  Commercial buying, albeit largely quiet for the time of year, seems to have picked up yesterday against light producer and profit taking type selling in 2011.  We look for continued commercial buy interest today and a mixed market early.

Barrel cheese demand appears to be softening somewhat while block cheese demand remains stable.   While we expect a slight downward correction on the CME spot cheese market in the short-term, if it doesn’t happen soon futures ought to rally once again to close the spread.  Nearby futures (Nov and Dec) have been on the defensive for the past two days already pricing in a substantial discount to the current spot market. 

Light producer selling has been a constant in 2011 as there seems to be this unanimous belief that prices have no choice but to fall at some time close to the roll of the New Year.  Seasonally that makes sense to us, but as we can see by the grain complex not everything follows seasonality.  Ordinarily we do not suggest covering one or two months for dairymen but rather look for profit margins six to 12 months out.  In this case, however, we suggest buying puts on unsold milk in November and December and simply getting your game plan in place for 2011 protection.

Class III traders are eyeing the dry whey futures market as both volume and price have risen this week.  While dry whey production has been declining somewhat, demand for sweet dry whey has not diminished – in fact, sources tell us it’s up.   While it doesn’t appear to be as serious an issue as it was in 2007, the same almost artificial production decline of dry whey appears to be at hand right now as the whey stream is diverted to other products.  Dry whey price strength should provide additional support to Class III prices and we look for a mixed trade on dry whey to start the day. 

Like the rest of the dairy complex, the NFDM futures curve is inverted with prices declining through July 2011.   Activity has been light on the exchange but carrying a slightly bearish tone.   Interest is starting to build and volume is transacting in the over-the-counter markets in the 1st half 2011 as buyers look for value in the low $1.10s.   International prices will be released mid-morning and we expect they will show stable pricing, which will provide some level of underlying support to NDM.

Grain prices closed lower yesterday for the first time in four very strong trading sessions.  Technically speaking, the market put in a short-term top yesterday, but finding some sort of price equilibrium in the USDA’s corn balance sheet is no easy matter.  Soybeans are now the undervalued crop from the producer’s standpoint, depending on soil type and prevailing weather.  Some farmers we talk to are eager and able to get fall tillage and applications down, unlike last year.  Perhaps field care from last year is a culprit of these lower than expected yields we see today.  It feels like there will be a lot of corn planted with plenty of time this year to get those fields better prepared.   Look for a slightly firm opening on the grain complex to open today.


10/13  Class III Futures:   Volume:  1,425  Open Interest (OI) Change:  +606   Total OI:  25,176
10/13  Class III Options:  Est. Put Volume:  895  Total OI:  20,976  Est. Call Volume:  600  Total OI:  17,305
10/13  Spot Markets:   Block Cheese $1.7700 (UNCH),  Barrel Cheese $1.7325 (DOWN 1/4),  Butter $2.1850 (UNCH),  NFDM: A $1.23 (UNCH),  X $1.2250 (UNCH)
10/13  Other Dairy Futures Volume:   Butter:  18  Dry Whey:  46  NFDM:  6  Class IV:  0   Cheese:  2   International SMP:  0

10/13 Individual Class III Futures Prices, Change, Volume & Open Interest
Oct         $16.82                  UP 2                       Vol:   52                OI Change:    UP 6
Nov        $16.13                  DOWN 2               Vol:   395             OI Change:     UP 90
Dec         $15.13                  DOWN 4              Vol:   311              OI Change:     UP 170
Jan 11   $14.52                  UP 2                       Vol:   158             OI Change:      UP 93
Feb 11    $14.15                  UP 3                       Vol:   106              OI Change:      UP 62
Oct-Dec 2010 Avg:    $16.02                DOWN 0.02/cwt
Jan-Dec 2011 Avg:     $14.60                DOWN 0.05/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