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 spot block cheese prices finished 2 ½ cents higher yesterday on bids only continuing the corrective bounce from $1.40 set on Nov 10. Futures traders are not convinced there’s much left to go on the correction as Class III milk prices settled unchanged to 12 cents lower through March on lighter volume. Volume appears to be heading out of the December contract and into next year as much of the open interest increase was spread evenly throughout 2011. Hedgers on both the buy and sell side of this market continue to lock in budget targets next year.

Overnight volume is fairly light and concentrated in January and February with the market mixed. Unless we see any surprises on the wires or during the CME spot session today, today could be quiet and mixed as traders consolidate positions heading into the long holiday weekend. We believe that cheese buyers are still interested in acquiring product to fill holiday orders and blocks will test the $1.50 mark over the next few trading sessions.

We are beginning to put together strategies for producers to protect against drastic milk price declines in the first half of 2011. While international cheese prices remain firm and CME spot prices are back on the upswing, we look back to history to understand that the Jan-June 10 year cheese average is less than $1.40. Producers don’t need to go through another 2009. Unless demand remains firm during the first half of next year, cheese inventories have the potential to weigh on the milk market to curb production.

CME spot butter prices continued to decline yesterday and we are likely to see a bit more easing as we close out 2010. While butterfat prices remain strong globally, this is the time of year when excess milk (school out) is diverted into storable commodities and much of that heads into the churn. Holiday buying is nearing its close and the recent CME spot price decline suggests it is all but over. Buyers will likely wait until the New Year (and lower prices) before refilling the pipeline for the Passover/Easter holiday. This hasn’t stopped hedgers from locking in prices for next year. Over 300 contracts exchanged hands in futures yesterday with prices mixed to mostly lower. Second half 2011 futures have a carry built into the market and yesterday’s action took out some of that premium.

The powder markets got in all of its trading done last week for the past two days have seen extremely quiet volume. There were zero trades in dry whey futures yesterday, the first time this has occurred since Sept. 27 and only the third time this year we’ve gotten a goose egg for activity. California’s NFDM prices continue to increase incrementally for the fourth straight week. For the week ending Nov. 20, the California weekly weighted average NFDM price was announced at $1.1767, up $0.70 on just less than 12 million pounds sold. NFDM futures volume was light but we did see strong volume in the OTC market yesterday on Jan-Dec 2011 contracts in the mid to upper $1.10s. If you have interest in locking in longer-term contracts on NFDM, give us a call.

The tone in today’s markets has become focused on worry and concern over the financial health of the European markets and large world economies. The bullish game in town is China, and they are under pressure to deal with the impact of U.S. easing policies on their own case of inflation which is likely far worse than we read. We look for a volatile day as December options roll off the board at 1:15 p.m. today. But we expect more bearish news for grains to trickle in after the Thanksgiving holiday. Look for a firm opening this morning.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010227.pdf

11/23 Class III Futures: Volume: 1,204 Open Interest (OI) Change: +496 Total OI: 29,249
11/23 Class III Options: Est. Put Volume: 289 Total OI: 24,539 Est. Call Volume: 306 Total OI: 21,256
11/23 Spot Markets: Block Cheese $1.4950 (UP 2 1/2), Barrel Cheese $1.44 (UNCH), Butter $1.78 (DOWN 2), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
11/23 Other Dairy Futures Volume: Butter: 301 Dry Whey: 0 NFDM: 13 Class IV: 0 Cheese: 21 International SMP: 0

11/23 Individual Class III Futures Prices, Change, Volume & Open Interest
Nov         $15.42           DOWN 1           Vol: 43          OI Change:              UP 1
Dec         $13.87           UNCH               Vol: 99           OI Change:              UP 25
Jan 11      $13.62          DOWN 8           Vol: 191         OI Change:              UP 3
Feb 11     $13.79          DOWN 12         Vol: 125         OI Change:              UP 34
Mar 11    $14.04          DOWN 2            Vol: 102         OI Change:             UP 51
Jan-June 2011                           Avg: $14.04                                    DOWN $0.02
July-Dec 2011                           Avg: $15.32                                    UP 0.03/cwt

Jan-Dec 2011                            Avg: $14.67                                   NO CHANGE

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