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.

CME Block cheese prices rose for the fifth straight trading session and barrels added a nickel to its price yesterday, the largest single day barrel price gain since November 20, 2009.   Class III futures prices also posted strong gains, in particular the near month August contract, up $1.10/cwt from its short-term low of $13.52 made on June 22.  September managed to close at $15.00, a price not seen in 2010 futures since mid-May and October tested the $15.00 level as well yesterday.   We continue to be impressed with the Class III futures rally as it runs well ahead of the CME spot cheese price but we do believe the $1.50 resistance point will be taken out in the near future.   Maintaining prices above $1.50 is exactly what commercial buyers will be looking for before taking a more aggressive position for the remainder of this year and into 2011.

While we believe that there are still legs to this latest Class III price rally, there are two points that give us a bit of caution.  First, yesterday’s Fonterra Global Dairy auction showed sharp declines (14 percent to 15 percent) on all three commodities (skim milk/whole milk powder & anhydrous milkfat).   Near month AMF prices still held a decent premium, but anticipation of a strong opening to Oceania’s production season are keeping international buyers from being too aggressive and near month powder and deferred month prices dropped sharply.  Those declines came a bit earlier than we expected as Oceania’s production season does not kick off for at least another 60 days. 

Secondly, open interest has not been impressive during the latest rally.  Looking back 10 trading sessions, Aug-Dec open interest has increased a total of 937 contracts, an average of less than 100 contracts per session.  Historically, bull markets tend to have high trading volumes and open interest can increase well over 500 contracts in a single trading session.  When reading into the CFTC’s Commitment of Traders Report last Friday, it still shows large speculators are net short and commercial buyers (processors/end-users) are outpacing commercial sellers (producers/cooperatives) by over 9200 contracts.   Unless we see volume and/or open interest spike over the next week or so, we may see a correction once CME spot cheese prices stabilize.

Dairy producers need to keep a close eye on this market and take advantage of opportunities to lock in coverage for the remainder of 2010.   Put options have now become affordable at reasonable premiums and futures prices are at profitable levels to sell.  We are recommending that producers take action on a percentage of their milk Aug-Dec 2010.  Call or email us to create a hedging strategy that works for your dairy.

Land O Lakes sent a letter to their customers last Friday to announce they are ending their membership with Dairy America at the end of 2010, the second cooperative to do so in the past year.  We believe this is a step in the right direction and likely a growing trend as cooperatives take back their powder marketing responsibilities to provide customers with more responsive and customized products and service to meet their needs.

We see yesterday’s grain trade as a reversal of the most recent spike in prices.  We have a red-light on buying feed needs at this time.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010128.pdf

7/6  Class III Futures:   Volume:  1221  Open Interest (OI) Change:  -3720 (+62 w/o June)  Total OI:  25,841

7/6  Class III Options:   Est. Put Volume:  625   Total OI:  18,379   Est. Call Volume:  407  Total OI:  17,093

7/6  Spot Markets:   Block Cheese $1.4750 (UP 2),  Barrel Cheese $1.45 (UP 5),  Butter $1.75 (UNCH),  NFDM: A $1.21 (DOWN 2),  X $1.23  (DOWN 1 1/2)

7/6  Other Dairy Futures Volume:   Butter:  62   Dry Whey:  21   NFDM: 76    Class IV:  0   CHEESE:  10

7/6 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.43      UNCH                   Vol:   0                      OI Change:  UNCH
Aug         $1.55       UP .024                 Vol:    1                     OI Change:  UP 1
Sep         $1.60      UP .019                  Vol:   9                     OI Change:  DOWN 2
Oct          $1.587     UP .004                 Vol:  0                     OI Change:  UNCH
Nov         $1.569     UP .007                 Vol:  0                     OI Change:  UNCH
Dec         $1.566      UNCH                  Vol:   0                    OI Change:  UNCH

7/6 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.51     UP 6                     Vol:  89                  OI Change:    DOWN 46
Aug         $14.62    UP 26                   Vol:  470                OI Change:   DOWN 14
Sep         $15.00    UP 18                     Vol:  351                OI Change:   UP 4
Oct          $14.97    UP 11                      Vol:  105                OI Change:  UP 11
Nov         $14.78    UP 5                       Vol:  47                 OI Change:  UP 5
Dec         $14.72    UP 13                      Vol:  74                 OI Change:  UP 19
Jul-Dec 2010 Avg:  $14.60                                           UP 0.14/cwt
Jan-Dec 2011 Avg:  $14.56                                           UP 0.04/cwt

Source:   FCStone/Downes-O'Neill