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 Milk traders’ reaction to Monday’s Milk Production report can be called mild at best with settlements reaching from two cents higher (July 10) to 14 cents lower (Dec 10) yesterday on light volume. Perhaps some of the negativity was trumped by CME spot block cheese prices reaching $1.60, the first time blocks have been this high since Dec 22, 2009. Or perhaps even with strong milk production in June, product availability has gotten tighter in July which is what both cheese and butter prices have been suggesting.  While futures prices did not take much of a hit yesterday, put option activity was fairly strong as hedgers are eagerly adding downside protection given the current fundamental picture of the cheese market.   We look for Class III futures to open steady to slightly weaker this morning as traders eye the CME spot market to see if 2010 highs can hold these levels. 

When prices were at historically low price levels in 2009 carrying into the first half of this year, there was a lot of complaining by industry players on both buy and sell sides. Now that prices are headed higher, we aren’t hearing much complaining from anyone.  That’s because nearly everyone in the industry benefits from higher cheese prices.  Producers are starting to make money again as suggested by June’s Milk Production report, owners of aged cheese can eek out a little profit from product they’ve been holding for a while.  From a sales perspective, we are hearing that orders are humming along and have not yet run into serious resistance. 

After visiting with customers at the International Food Technology Expo in Chicago yesterday, there seems to be a resurgence of new product development concepts that will likely spur on increased demand over the next six to 12 months.  And the percentage of international booths and attendees at this year’s show suggest that the U.S. is part of the global food marketplace with potential for impressive demand growth in the coming years.  But we already knew that.  

Both milk and cheese producers and users need to take a look at current futures market conditions as an opportunity.   While the market appears poised for more price strength, we have our fair share of mixed news.  As such, we recommend that producers buy put options to protect the balance of 2010.  End-users are able to lock in cheese prices BELOW the current CME spot market from now through December 2011.   If you need help creating a prudent risk management strategy for your company or dairy, please let us know.

CME spot butter prices continue to inch higher and butter players still tell us that cream and butterfat is tight here in the U.S. Futures trading was almost non-existent yesterday with only one contract exchanging hands.  We expect more strength in both CME spot and futures prices in the near term. CME’s weekly butterstocks report yesterday showing only a slight net out-movement.  For the week ending July 17 - 49.263 million pounds of butter were reported in CME approved warehouses, down just 1 percent from the previous week but still a striking 49.4 percent less than a year ago.   

The monthly Cold Storage report will be released Thursday afternoon and will likely provide more bullish data for butter and slightly bearish data for cheese.   We are expecting June butter stocks to be down over 20 percent vs. a year ago, American and Total Cheese in the plus 4 to 5 percent range.   

Corn prices got a reprieve from their recent declines as prices firmed 4 cents per bushel overnight.  While Chicago evaded an expected deluge yesterday as wet weather stayed south, a good swath of the Corn Belt has either received some moisture or will today.  In fact, the weather service is still calling for some potentially severe weather to stretch from the western plains to the Ohio RiverValley.  The concerns of frying the crop are dwindling rapidly as prices have fallen.  Like a plane landing in heavy winds, we expect there to be some choppy activity to the corn trade as it begins its descent into an early harvest.  Producers ought to hold off on locking up any contracts on corn that would take them out more than a month from today.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010138.pdf

7/20  Class III Futures:   Volume:  758  Open Interest (OI) Change:  +98  Total OI:  27,799

7/20  Class III Options:   Est. Put Volume:  613   Total OI:  19,703   Est. Call Volume:  299  Total OI:  18,400

7/20  Spot Markets:   Block Cheese $1.60 (UP 2 1/4),  Barrel Cheese $1.5275 (UP 1/4),  Butter $1.78 (UP 1/2),  NFDM: A $1.2175 (UNCH),  X $1.2250 (UNCH)

7/20  Other Dairy Futures Volume:   Butter:  1  Dry Whey:  48   NFDM: 79    Class IV:  3   Cheese:  4

7/20 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.456     UNCH                Vol:    0                    OI Change:  UNCH
Aug         $1.587      UNCH                Vol:    0                   OI Change:   UNCH
Sep         $1.595      UNCH                Vol:    0                   OI Change:   UNCH
Oct          $1.593      DOWN .002     Vol:    0                    OI Change:  UNCH
Nov         $1.576      DOWN .004     Vol:   0                     OI Change:  UNCH
Dec         $1.58        UNCH                Vol:    4                    OI Change:  UP 4

7/20 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.77     UP 2                   Vol:  56                   OI Change:      DOWN 41
Aug         $14.93     UP 1                   Vol:  271                  OI Change:      DOWN 5
Sep         $15.00     UNCH                Vol:  187                  OI Change:     UP 81
Oct          $14.85     DOWN 7            Vol:  35                   OI Change:     UP 20
Nov         $14.63     DOWN 7            Vol:  26                  OI Change:      UP 6
Dec         $14.72     DOWN 14           Vol:  29                 OI Change:      UP 5
Aug-Dec 2010 Avg:  $14.80                                       DOWN 0.05/cwt
Jan-Dec 2011 Avg:  $14.56                                         DOWN 0.01/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