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 finished last week on a volatile note to say the least. After having ticked higher throughout the week, end of the week selling spilled over into panic as sellers of December and January sought out bids as much as 59 cents lower. It was profit-taking gone awry.The market recognized this and swiftly pushed December and January back towards unchanged by the end of the session. Meanwhile, size bids made their way into the more deferred Class III as what appears to be commercial buy orders worked their way into the market. We look for a mixed to firm trade to start the week as we roll to price the December contract with today’s spot cheese trade.

One area that may have helped spur Class III activity Friday was a dramatic increase in trading activity for the CME dry whey futures contract. Sizeable bids were placed at 40 cents From January to June. Sellers -- likely those commercial buyers who bought Class III and were looking to remove whey risk – sold into those orders bringing trading volume for dry whey to an impressive 142 contracts Friday. More important to note is that dry whey over 40 cents means reduced margins for cheese manufacturing plants across the country. We’re a far cry from that meaning less fresh cheese, but it is on our radar.

Not to be outdone by Class III and dry whey, the CME cheese futures contract posted a record trading day Friday. There have been some arbitrage opportunities between Class III, dry whey and cheese, but likely the spike in volume was more the result of commercial cheese hedging. There remains little worry of prices during the first half of 2011 running away to the upside but commercial buyers are beginning to take a slightly more aggressive approach to solidify budgets.

After Thursday’s session which saw limit up moves in NFDM, Friday’s trade was mixed on moderate volume giving back some of the previous day’s gains. Fonterra’s gDT auction price increase on skim milk powders earlier in the week may have prompted hedgers to become more aggressive to lock in fixed pricing for 2011.

After a four cent decline in CME spot butter, futures traders appeared to have expected the move as the deferred contracts settled mixed on strong volume. Volume was fairly consistent across all contract months which was likely hedgers getting coverage with the Jan-Dec average settling under $1.63.

Why have exports to China remained so strong? Perhaps because stories like this continue to surface. In a story released earlier this morning, market regulators in Xiangfan of central China's Hubei province have started an "all-out search" for a batch of dairy products that is believed to contain melamine.

Even somewhat bullish technical indicators couldn’t keep the volatile corn market positive last week. There remains a tight balance sheet and a looming acreage battle in the not-so-distant future, but the short-term market is weak and we are bearish. It is important to remember that big profits mean big capital investment. High prices lure all types of increased production around the world. If you buy feed, we look to buy calls options for any additional protection. If you’ve locked up feed, we want to look at buying puts beneath the market to give you a floor on that purchase. If you farm ground, don’t wait for ending stocks to jump before your farming operation has lots of big profits tied up.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010225.pdf

11/19 Class III Futures: Volume: 2,515 Open Interest (OI) Change: +565 Total OI: 28,509
11/19 Class III Options: Est. Put Volume: 557 Total OI: 24,049 Est. Call Volume: 281 Total OI: 20,892
11/19 Spot Markets: Block Cheese $1.4450 (UNCH), Barrel Cheese $1.4300 (UP 1), Butter $1.8900 (DOWN 4), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
11/19 Other Dairy Futures Volume: Butter: 134 Dry Whey: 142 NFDM: 44 Class IV: 14 Cheese: 247 International SMP: 0

11/19 Individual Class III Futures Prices, Change, Volume & Open Interest
Nov            $15.43              DOWN 5          Vol: 185         OI Change:        UP 12
Dec            $13.92              DOWN 7          Vol: 766          OI Change:        UP 87
Jan 11        $13.81              DOWN 16        Vol: 443          OI Change:        DOWN 50
Feb 11       $13.95              DOWN 7          Vol: 256          OI Change:         UP 110
Mar 11      $14.09              UP 9                  Vol: 255          OI Change:         UP 94
Jan-June 2011               Avg: $14.06                              DOWN 0.02/cwt
July-Dec 2011              Avg: $15.30                              UP 0.05/cwt

Jan-Dec 2011              Avg: $14.68                              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