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.

Class III futures and options at the CME started off the week in an eerily quiet fashion with prices settling mixed.  In fact, yesterday’s volume was its lowest single day total in over three months.  For now, it appears that broad fundamental news has already been factored into the market and with a lack of anecdotal news or spot cheese price movement to set the futures tone, traders and hedgers seem complacent at current levels.   A bull market needs to be stoked in order to keep its trend in tact.  A steady spot market will point near month futures in a cautiously higher direction but will continue to leave the skeptics in place for anything out past 30-45 days.

Chatter around the country has reached a standstill and we are hearing very little in the way of cheese.   Milk production has recovered nicely in the West and is starting to come back in the Midwest, but the lack of strong component levels in the milk has impacted product production yields.   Demand for fresh cheese has remained strong but many are not sure how strong October orders will be once the calendar page has turned.  Those on monthly pricing have been paying $1.636 for September block cheese will likely pay an additional 10 cents/lb more for that same cheese next week.  For now, cheese prices appear to be supported at these levels and while some cheese has started to show up at the exchange, it has not come from the major players.

The Commitment of Traders report released by the CFTC last Friday continues to show that non-commercial traders (large speculators) are net long 686 Class III futures and options positions.   This is down 94 positions from the previous week but on light activity from this group.   However, the vast majority of positions added between Sep 15-21 were commercial shorts, which likely represent dairy farmers contracting through their cooperatives.   In light of stronger prices, dairymen are active locking in profitability and that is good to see.

CME spot butter added ½ penny to yesterday and Nov & Dec futures responded in kind, up three and two cents, respectively on very light volume.  While butter options contracts have been virtually non-existent in the past, it is worth noting that this market is starting to generate some interest and some trading activity.   A total of 12 call options traded at $1.80 strike in December, the $1.66 strike in January and the $1.62 strike  in February all traded yesterday.   For those with interest in using butter options, please give us a call as this market is starting to find its footing.

July Commercial Disappearance numbers will be released by the USDA later today giving us a look back dairy product demand.  While not necessarily important to what’s happening in today’s marketplace, it tends to confirm trends that we have been expecting based on the price movements of the past two months.

In the news:   European Union farm ministers failed to agree on what steps to be taken to avoid a repeat of last year’s dairy crisis that caused record low milk prices.  Sound familiar?  The European Commission is set to make legislative proposals to the EU dairy sector by the end of the year.  Some of the reforms being considered include the creation of dairy futures markets and the use of long-term supply contracts for dairy farmers.   

Corn futures traded a fresh high overnight Sunday and sold off, finishing nine cents lower by Monday’s close.   The grain markets have been volatile with inflationary talk seizing the attention of more and more managed speculative money over the past week let alone end-user buying.  Technically, however, yesterday’s market movement will put market bulls on guard as it is weak in nature.  And as the news shifts to dry weather, rolling combines and slightly better yields, it will be a challenge to keep prices propped up this morning.  To add to the bearish feel this morning, the USDA reported that corn is now 27 percent harvested as of Sunday, up from 18 percent last week and 6 percent harvested last year.

The next big piece of scheduled market news is the USDA’s Quarterly Stocks in All Positions Report, which will be released on Thursday morning.  The issue of “light test weight” corn from last harvest is making this report more uncertain than normal.    Traders are eagerly awaiting these numbers to know how much was left in the bin from prior years’ crops and more accurately calculate their supply/demand tables.   Look for a lower opening in the grain complex today.

9/27  Class III Futures:   Volume:  372  Open Interest (OI) Change:  +97   Total OI:  27,785
9/27  Class III Options:  Est. Put Volume:  137   Total OI:  21,964  Est. Call Volume:  95  Total OI:  17,938
9/27  Spot Markets:   Block Cheese $1.75 (UNCH),  Barrel Cheese $1.7350 (UNCH),  Butter $2.2350 (UP 1/2),  NFDM: A $1.23 (UNCH),  X $1.2250 (UNCH)
9/27  Other Dairy Futures Volume:   Butter:  30  Dry Whey:  0  NFDM:  15   Class IV:  4   Cheese:  0   International SMP:  0

9/27 Individual Class III Futures Prices, Change, Volume & Open Interest
Oct        $16.55                 UP 2                      Vol:   88               OI Change:    UP 6
Nov       $15.97                 UP 3                      Vol:   86               OI Change:    UP 24
Dec       $15.27                 DOWN 4              Vol:    50               OI Change:    UP 2
Jan 11    $14.58                 DOWN 2              Vol:   12               OI Change:    UP 4
Feb 11    $14.00                DOWN 3              Vol:   19               OI Change:    UP 3
Oct-Dec 2010 Avg:  $15.93                   NO CHANGE
Jan-Dec 2011 Avg:  $14.41                    DOWN $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