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.

After posting losses for eight straight sessions, CME spot barrel cheese prices finished higher yesterday for the first time since Sept. 21. The four-cent gain in barrels and ½ cent increase in block cheese narrowed the block/barrel spread to a more reasonable 3¼ cents and gave market bulls fuel to push Class III futures prices 11-14 cents higher Dec-Feb on strong volume. After posting new contract lows last Friday, Dec, Jan and February futures have rallied 79, 55 and 36 cents, respectively, from those lows in just three trading days. Volatility reigns in the commodity markets and while the grain markets have shown sharp declines over the past week, milk futures have been buoyed by seasonal demand and international price strength.

Is there more left in the tank for this Class III futures rally? That’s all going to depend on where cheese prices head in the near term. While the threat of excess barrels is still weighing over the marketplace, the increase in CME spot barrel prices might be a sign that some of that inventory has been cleaned up.This makes sense given that cheese prices have shown sharp declines over the past few weeks and the time of year is ripe for increased orders to fill the pipeline for holiday and Super Bowl promotions. But it will take more than a four-cent gain during a single spot session to convince us that barrel sellers are out of product. With the current spot Class III milk price at $13.56/cwt, futures traders are pricing in a premium in the December contract. But if those gains do not materialize, watch for a correction. Next week begins pricing December futures against CME spot.

In other dairy markets, CME spot butter lost 3½ cents but with the exception of December futures (down 2.5 cents), butter futures found support in 2011 settling steady to a penny higher on decent volume. Traders are expecting seasonal decreases in butter prices over the next month and the presence of multiple sellers at the CME over the last couple of days has provided us a bit more confidence to make that call. However, the difficulty will be predicting how drastic the decline will be. With butter inventories sharply down from previous years and global butterfat prices still at lofty levels; a decline below the $1.50-$1.60 level by year’s end seems unlikely. But as those who have studied the dairy markets over the last number of years, dairy prices tend to overshoot consensus opinion both on the way up and on the way down as well.

USDA is set to release the October Milk Production report this afternoon at 2 p.m. CST. We are looking for year-over-year gains to eclipse 3 percent growth for the second straight month. Our California analyst is looking for production gains in that state to come in just above 5 percent after a very strong September.

End-user buying stepped back into the grain complex yesterday and overnight lending support to a broad-base of ag commodities. So far, this appears to be a bear-bounce and not a reversal of trend. We all knew when the speculative grain traders ran for cover, the exit door would not be big enough. That is what has happened over the past week and there is likely more fund blood-letting to come. Look for corn to open 13 to 18 cents per bushel higher and soybeans to open 25 to 30 higher.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010223.pdf

11/17 Class III Futures: Volume: 1,776 Open Interest (OI) Change: +148 Total OI: 27,804
11/17 Class III Options: Est. Put Volume: 723 Total OI: 23,010 Est. Call Volume: 401 Total OI: 20,061
11/17 Spot Markets: Block Cheese $1.4225 (UP 1/2), Barrel Cheese $1.3900 (UP 4), Butter $1.9500 (DOWN 3 1/2), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
11/17 Other Dairy Futures Volume: Butter: 107 Dry Whey: 21 NFDM: 19 Class IV: 10 Cheese: 36 International SMP: 0

11/17 Individual Class III Futures Prices, Change, Volume & Open Interest
Nov       $15.46         UP 3              Vol: 67          OI Change:               DOWN 4
Dec       $13.84         UP 14            Vol: 557         OI Change:              DOWN 21
Jan 11    $13.76        UP 11            Vol: 381         OI Change:              UP 22
Feb 11   $13.77        UP 12            Vol: 210         OI Change:              DOWN 31
Mar 11   $13.90        UP 5             Vol: 57           OI Change:               UP 16
Jan-June 2011 Avg:      $13.97                         UP 0.05/cwt
July-Dec 2011 Avg:      $15.30                         UP 0.01/cwt

Jan-Dec 2011 Avg:       $14.63                        UP 0.02/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