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.

Fonterra’s Global Dairy Trade (gDT) auction results were strong across the board yesterday, up 16.9 percent against last month’s basket index.  This erases some of the losses incurred at the gDT over the past few months.  In their typical, post-report press release, Paul Grave, manager of gDT said the result of the latest auction “appeared to indicate a firmer tone has returned to the market over the last month.”  Fonterra will begin to hold gDT auctions twice a month moving forward with the next auction to be held on September 15, increasing dairy price discovery for the global community.  USDA releases their bi-weekly international price report for Oceania and Europe later this morning.

While the international news was likely supportive of Class III and cheese futures, a higher spot barrel market also provided bullish fuel.   Futures settled close to their highs in 2010 months and there was even a little spill over into January 2011 as volume and open interest were strong in that particular deferred month.  We look for more support in the near months this morning.

However, Mar-Dec 2011 futures were under attack yesterday as aggressive producer orders continue to flood in, pushing prices 2-26 cents lower.   The most weakness came in the second half 2011 where futures fell nearly 13 cents on average.   Lack of resting orders under the market likely led to these sharp declines, but the battle isn’t over as overnight, Feb-Oct 2011 futures are down 2-7 cents.  Look very closely at the activity in the deferred months today – there are sizeable offers posted Mar-June and as we stated in yesterday morning’s email, buyers have been laying in the weeds accumulating futures contracts near these levels.  At present price levels, we agree with the buyers’ logic and find current prices out there a value.   We expect buyers to continue this pattern today and if they continue to buy these size offers, it suggests that prices will move higher in the near term once the first wave of producer selling subsides.

CME spot butter inched a penny higher yesterday on a lone bid, but sellers continue to shy away from this market.   Futures volume was moderate and concentrated Sep 10 – Jan 11 and prices were mixed.   Open interest was slightly lower suggesting that long liquidation continues to be a key feature in this market.   NFDM and dry whey futures markets were quiet yesterday with little volume.

California released their August class prices yesterday with 4a at $15.69, up $0.07 from last month and $5.48 higher from Aug 2009.   Class 4b prices were announced at $14.39, up $1.02 from last month and $3.10 higher than last year.   USDA will release August Class prices this Friday morning.

Traders continued the march towards $4.50/bushel December corn yesterday after shrugging off Monday’s somewhat bearish Crop Progress Report.  While the market has been well-supported at these levels, stimuli to bring in fresh buying appears to be somewhat fleeting this morning.  FCStone released their Crop Production Report estimates late yesterday afternoon and pegged yields at 162.9 bu/acre, down from 165.8 bu/acre last month.   Stone also trimmed soybean yield expectations down from 44.0 bu/acre to 43.5 bu/acre.  While these numbers are lighter than last month, they are in line with what the trade has been talking about for the past week:  lower yields.  In fact, we suspect that corn futures have already priced in the potential for a 162/162.5 bushel yield.  We look for corn to open mixed this morning.


9/1  Class III Futures:   Volume:  1170  Open Interest (OI) Change:  +374  Total OI:  28,711

9/1  Class III Options:  Est. Put Volume:  356   Total OI:  21,518  Est. Call Volume:  254  Total OI:  19,155
9/1  Spot Markets:   Block Cheese $1.71 (UNCH),  Barrel Cheese $1.6750 (UP 1),  Butter $2.2250 (UP 1),  NFDM: A $1.2150 (UNCH),  X $1.2250 (UNCH)

9/1  Other Dairy Futures Volume:   Butter:  68  Dry Whey:  4  NFDM:  18   Class IV:  0   Cheese:  8   International SMP:  0

9/1 Individual Class III Futures Prices, Change, Volume & Open Interest
Sep          $16.19              UP 12                            Vol:   131             OI Change:     UP 53
Oct          $15.88               UP 13                           Vol:   253             OI Change:     UP 47
Nov         $15.23               UP 16                            Vol:   275             OI Change:      UP 32
Dec         $14.75               UP 10                            Vol:   131              OI Change:      UP 22
Jan 11      $14.23               UP 6                             Vol:  132              OI Change:      UP 82
Sep-Dec 2010 Avg:  $15.51                     UP 0.11 /cwt
Jan-Dec 2011 Avg:  $14.30                     DOWN 0.07 /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