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 were tempered after another CME spot cheese price increase yesterday. Traders may have paid more attention to the nine-cent drop in butter than the slight increase in spot cheese. Nevertheless, futures are choppy as ample supplies of cheese remain piled up around in the country. This bearish reality is pegged against questions of holiday buying, which appears to have put on hold so far this year. The question on everyone’s mind should be, will buyers get nervous because they don’t have enough bought during this seasonal peak in domestic demand? That answer remains to be had, but the next two weeks will be interesting.

Commercial buyers remain a supportive feature of 2011 Class III futures trading. Producer selling has cooled some over the past week with margins still very tight to non-existent for the first half of 2011. Based on current spot levels, Class III is pricing near the $13.93 level and therefore near month futures are pricing at a slight discount. We believe this week’s CME pricing is Week 1 of December NASS calculations and that cheese prices will test the $1.50 level over the next week or so. Look for a mixed open this morning on lighter volume as traders eye the spot markets for price direction during this shortened holiday week.

CME spot butter fell nine cents yesterday to settle at $1.80 on offers only without any trades. Contacts suggest that holiday buying in butter is all but complete and prices may have a bit more downside before finding support. Butter futures are pricing in that discount and based on Dec & Jan futures, a decline into the $1.60s is being anticipated. However, there is ample support at $1.60 as first quarter futures dropped below that level last week only to rally back above it even as spot prices continue to decline.Global butterfat prices remain at historically high levels and this may keep US prices supported at higher-than-anticipated levels into 2011.

Powder markets were quiet yesterday with little volume. The NFDM futures curve is still very flat in 2011 as traders struggle to find market direction. After last week’s dry whey volume surge, yesterday’s action was reserved with only 22 contracts exchanging hands and little price movement. First-half whey prices appear well supported near 40 cents.

CWT accepted three bids for export assistance for a total of 582,000 pounds of cheddar cheese to Middle East and Asia. The product will be delivered through March 2011. Since reactivating the Export Assistance program in March, CWT has assisted its members in exporting 67.1 million pounds of cheese to 25 countries on four continents.

The pressure on corn is real and will not likely let up today. Of course, with North Korea firing on South Korea overnight, anything is possible. But we think that will mean a higher U.S. Dollar and weaker grain prices. Look for a slightly weaker opening on corn and soybeans.

The CFTC Commitment of Traders Report from last Friday showed massive liquidation of long grains by speculative traders. They now hold a total net long position of 636,000 contracts (versus a peak of 811,000 contracts in grains and oilseeds) their smallest ownership since the beginning of August. These speculative traders are made up of mostly trend followers and when the trends turned down they sell aggressively.

Cold Storage Comments

Most industry participants know the US is swimming in cheese and yesterday’s Cold Storage report should not have been a surprise to cheese traders. American Cheese was up 10.2 percent over year ago levels in October and was the second month in a row that stocks increased vs. the previous month, a feat not seen in years. Mexico has been a major importer of cheddar cheese and the import tariffs set by the Mexican government two months has slowed exports to that country. That, along with peak prices for cheese during October kept much of that product in warehouses instead of in another country or in the hands of end-users as they waited for prices to decline. However, these numbers are at historic highs and could have a longer term impact on US prices if we can’t find a home for the cheese. Cheese prices in the $1.40s vs. international prices in the $1.80s may be the catalyst to get more cheese moving overseas.

One surprising figure was that the Other Natural Cheese category was only 1 percent higher vs. last year, narrowing the gap to 2009 as American cheese continues to widen. Mozzarella production was up 7.6 percent in September and we expect that trend to continue into October. While we are making a lot more Mozzarella cheese in this country, we don’t appear to be storing it. Competition in the frozen and chain pizza space has been fierce over the past year and it is showing in the data. Demand for mozzarella cheese is strong.

Butter stocks are still sharply lower than last year but within industry expectations, so we don’t expect this to impact the markets in the near term.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010226.pdf

11/22 Class III Futures: Volume: 1,300 Open Interest (OI) Change: +256 Total OI: 28,753
11/22 Class III Options: Est. Put Volume: 194 Total OI: 24,393 Est. Call Volume: 176 Total OI: 21,109
11/22 Spot Markets: Block Cheese $1.47 (UP 2 1/2), Barrel Cheese $1.44 (UP 1), Butter $1.80 (DOWN 4), NFDM: A $1.2250 (UNCH), X $1.2250 (UNCH)
11/22 Other Dairy Futures Volume: Butter: 66 Dry Whey: 22 NFDM: 3 Class IV: 2 Cheese: 14 International SMP: 0

11/22 Individual Class III Futures Prices, Change, Volume & Open Interest
Nov          $15.43      UNCH            Vol: 35           OI Change:                DOWN 11
Dec           $13.87      DOWN 5       Vol: 350         OI Change:                DOWN 147
Jan 11       $13.70      DOWN 11     Vol: 195         OI Change:                 UP 67
Feb 11      $13.91      DOWN 4       Vol: 102         OI Change:                 UP 13
Mar 11      $14.06     DOWN 3        Vol: 139         OI Change:               DOWN 7
Jan-June 2011          Avg: $14.06                         NO CHANGE
July-Dec 2011          Avg: $15.29                         DOWN 0.01/cwt

Jan-Dec 2011           Avg: $14.67                        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