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.

Prime Minister Vladimir Putin announced he will back a plan to ban grain exports effective August 15.  This news sent Chicago and Kansas City Wheat futures limit up overnight.  Corn and soybeans followed trading 10 to 15 cents per bushel higher. 

On the surface, this is a political game changer of the most severe ilk.  Historically, however, commodity export bans force buyers to cover needs ahead of the ban or just wait for trading to resume.  The alternative is buyers will just go shopping elsewhere which brings business to exporters who have the inventory such as the U.S.  Of course, U.S. wheat is a milling grade and largely more expensive than what other nations want to buy.  But if they need they will come here.  And U.S. futures prices were bracing for that in the overnight trade.

With the final USDA Crop Production Report out next Thursday, we maintain our position that long-term feed needs should not be contracted now.  While prices should be sharply higher this morning, buyers ought to let the news be absorbed by the market before making any decisions.  We are reminded of a story told to us early in our career about how corn blight many years ago shot corn prices skyward to the point Walter Cronkite left his cushy New York office to broadcast from an Illinois corn field showing the world first hand what corn blight looked like.  We are also reminded of how that broadcast marked a top for corn futures that year. 

Turning to dairy, Class III prices maintained Tuesday’s weaker posture yesterday on little fresh news and after an uneventful cash market trade that left the price of both blocks and barrels unchanged once again.   An increase in what appeared to be producer selling interest from October though the middle of 2011 helped to slowly ease those prices slightly lower throughout the day.  Commercial buyers are few and far between but lightly picking away at offers this time of year.  Traders will be watching both the spot cheese market as well as the USDA international prices, which will be released later this morning.  Look for a mixed to lower opening this morning on Class III.

Butter futures showed signs of a maturing market as prices consolidated yesterday on healthy volume (113 contracts).   Open interest declined as long-liquidation marked the key feature of the day.  After two weeks of rising inventories, weekly cold storage numbers showed a 1.8 percent decline in butter stocks last week.   Reports of continued butterfat tightness are still par for the course.  Look for butter futures to open mixed to slightly lower.

While the fundamental picture is not real supportive of higher NFDM prices, buyer support has made its way back to that futures market over the past two weeks.  The Dry Whey market too is showing signs of trading interest and volume growth.   From a technical perspective these markets appear to be bottoming. 

Fonterra informed its members yesterday that the strong currency and drop in international prices meant the board would review the payout forecast for the 2010/11 season.  Bank of New Zealand economist Doug Steel said milk production for the 2010/11 season could rise by about 8-10 percent.  Falling dairy prices made Fonterra's new season forecast a challenge, Steel said. 


8/4  Class III Futures:   Volume:  667  Open Interest (OI) Change:  +240  Total OI:  25,373

8/4  Class III Options:  Est. Put Volume:  303   Total OI:  18,450   Est. Call Volume:  272  Total OI:  16,590

8/4  Spot Markets:   Block Cheese $1.6025 (UNCH),  Barrel Cheese $1.56 (UNCH),  Butter $1.8425 (UNCH),  NFDM: A $1.21 (UNCH),  X $1.2250 (UNCH)

8/4  Other Dairy Futures Volume:   Butter:  113  Dry Whey:  76   NFDM:  10   Class IV:  17   Cheese:  19

8/4 Individual Class III Futures Prices, Change, Volume & Open Interest
Aug         $14.94                 UP 2                       Vol:  109               OI Change:     UP 61
Sep          $15.14                  UP 1                        Vol:  125              OI Change:     UP 53
Oct          $14.82                 DOWN 3                Vol:  90                OI Change:     DOWN 4
Nov         $14.65                 DOWN 1                Vol:  71                OI Change:     UNCH
Dec          $14.55                 DOWN 11               Vol:  75               OI Change:     UP 2
Aug-Dec 2010 Avg:  $14.82                                                  DOWN 0.02/cwt
Jan-Dec 2011 Avg:  $14.57
                                                     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