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.

The first half of 2010 ended with a bang yesterday as spot cheese and butter posted solid gains leading Class III and butter futures to rally.   Class III futures were hot out of the gate, trading 5-10 higher heading into the spot cheese market.   Four different buyers in blocks and two in barrels were actively seeking product - but sellers were noticeably absent.    August futures led the charge, up as high as 33 cents intraday before backing off somewhat.   In the end, July-Dec 2010 futures finished 1-26 cents higher on solid volume.   Overnight, Class III futures are trading unchanged to nine cents higher on moderate volume and we expect follow through buying today.

We suspect much of the buying community is on vacation over the next two weeks and will be surprised to return to their desks seeing cheese prices testing the $1.50 level for the fourth time this year.   Many companies have risk management policies that prevent them from hedging too far out into the future.   July 1 may open the door for many to lock in 2011 contracts.   With cheese prices from Aug 2010 – Dec 2011 at or near the five year average, we believe that commercial buyers may begin their 2011 hedging programs.   A CME spot cheese market that fails to break through the $1.50 mark will likely prevent buyers from being too aggressive.   But once that resistance point is broken through, and we believe it will at some point in the third quarter, buyers will step into the market with a bit more fervor.

CME spot butter prices finished at $1.75 yesterday, up three cents from Tuesday and now just two cents below the five year high of $1.77 on October 24, 2008.   Once that price is broken, and we believe it will, the next price target we talk about is the last time butter prices were above $2.00 which was December 8, 2004.  

Corn traders wasted little time pricing the possibility that we have 500 million less bushels of corn in inventory than we thought we had on Tuesday evening.  Opening 20 cents higher and quickly moving to limit bid as shorts scrambled and end-users jumped over one another to get coverage pushing price to 30 cents higher and stopping the trade at limit bid.  Grain procurement managers had to sweat out that limit bid for about 20 minutes or so before the market began to trade again. 

There is some talk that yesterday’s numbers will be revised by USDA, but the trade had to price in this fresh news and we think they have done a good job of that so far.  We look for a steady to firm opening on corn on follow through buying.  Perhaps prices will firm slightly into the long holiday weekend.  But we look at this rally as a welcomed sell opportunity for farmers who still have grain in the bin to sell.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010125.pdf

6/30  Class III Futures:   Volume:  1047  Open Interest (OI) Change:  +148  Total OI:  29,853

6/30  Class III Options:   Est. Put Volume:  176   Total OI:  21,618   Est. Call Volume:  222  Total OI:  20,773

6/30  Spot Markets:   Block Cheese $1.42 (UP 1 3/4),  Barrel Cheese $1.3975 (UP 2),  Butter $1.75 (UP 3),  NFDM: A $1.2300 (DOWN 1),  X $1.2450  (UNCH)

6/30  Other Dairy Futures Volume:   Butter:  30   Dry Whey:  59   NFDM: 36    Class IV:  0   CHEESE:  7

6/30 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul - $1.43             UP .007                  Vol:  0                    OI Change:  UNCH
Aug - $1.496         UP .016                  Vol:  5                     OI Change:  DOWN 5
Sep -$1.562           UP .012                  Vol:  1                     OI Change:  UP 1
Oct - $1.568          UP .011                   Vol:  1                     OI Change:  UNCH
Nov -$1.56             UNCH                    Vol:  0                    OI Change:  UNCH
Dec -$1.545           UNCH                    Vol:  0                    OI Change:  UNCH

6/30 Individual Class III Futures Prices, Change, Volume & Open Interest
Jun - $13.61          DOWN 1                Vol:  14                   OI Change:  UNCH
Jul - $13.50           UP 9                       Vol:  101                 OI Change:  DOWN 31
Aug - $14.13          UP 26                     Vol:  397                OI Change:  UP 61
Sep - $14.76          UP 16                      Vol:  202                OI Change:  UP 22
Oct - $14.78          UP 8                       Vol:  51                   OI Change:  UP 2
Jul-Dec 2010 Avg:  $14.40                                           UP 0.11/cwt
Jan-Dec 2011 Avg:  $14.51                                            UP 0.02/cwt

Source:   FCStone/Downes-O'Neill