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.

Chicago Mercantile Exchange spot cheese continued its upward track as the sellers that surfaced on Friday were nowhere to be found during yesterday’s trade. Class III futures were hot out of the gate yesterday as August and September, far and away the Monday volume leaders, were 10-13 cents higher heading into the spot trade and added to those gains after the cash session was completed.

Third-quarter futures saw the biggest pop upward, and while the fourth quarter settled higher, the gains were fairly tempered. Open interest did not make much of a splash yesterday and deferred contract volume was fairly light, leading us to believe that commercial buyers were mostly absent from the marketplace. 

However, spread trading between the August and September Class III contracts has been quite popular for the past two weeks, as likely those that got in when the spread was 80 cents two weeks ago are busy taking their profits (removing futures positions) as the spread lingered near 20 cents yesterday.
We have noticed that the Class III futures curve has morphed from a full blown cost-of-carry market (also can be called a premium or contango market) a couple of months ago to a more flat-lined curve last week and is beginning to evolve into an inverted market, where nearby months trade at a premium to deferred contracts.

This is already the case in 2011, where futures prices are all at a discount to August 2010. Sometimes this can be a technical sign of a market turning from long-term bearish to long-term bullish. (Think June 2008 with prices near $20 per hundredweight in the front months, while 2009 traded $1-$1.50 per cwt. below.) While the fundamentals do not currently suggest that a bull market is under way, we do think this market sets up nicely for continued gains in the near-term.
CME spot butter rose 0.75 cents yesterday to match the six year high set on Oct. 13, 2008. Butter fundamentals remain strong in the near term and front month futures are playing catch up to the spot market.  

As mentioned above regarding Class III futures, the butter futures curve is completely inverted, with front month August as the high priced month and everything behind it trails downward. If summer heat continues and the stocks numbers continue to decline over the next few weeks, butter prices could be on their way to the next long-term level of resistance point of $2 per pound that we haven’t seen since December 2004.
In our comments a couple of weeks ago, we mentioned the second half 2011 dry whey futures carrying an unrealistic premium to the rest of the months. Over the past two days, futures traders agreed with us and have taken that curve back down to more reasonable levels, perhaps even too far the other direction. October, November and December 2011 dry whey futures have fallen 4, 8, and 9 cents respectively as limits on these contracts were expanded yesterday. We expect the free-fall to cease very soon as the second half 2011 average is now at 33.33 cents. Otherwise, dry whey futures trading has been quiet and with little fanfare.
CWT accepted one bid yesterday for 220,463 pounds (100 metric tons) of cheddar cheese to Africa. Since CWT reactivated the Export Assistance program on March 18, it has assisted members in making export sales of cheddar, Monterey Jack, and Gouda cheese totaling 37.7 million pounds (17,095 metric tons).
Seventy-three percent of the corn crop was rated “good to excellent” as of Sunday, which was 2 percentage points better than last week. Pre-report expectations had crop ratings holding steady or declining by as much as 2 percent, not rising by 2 percent. Overnight, the market priced in the adjustment trading as much as 4 cents lower. We look for a steady to slightly lower opening this morning. 
Unless you are selling milk and locking in a margin, we have the red light on buying corn and soybean meal at this time. This is the time for the farmers to sell any remaining corn in the bin for this year. We suggest you make sales or buy December 2010 put options as protection. If you have made no sales of corn into 2011, we suggest that you make a sale of at least a small portion of your production. Sell futures if your buyer won’t offer you a contract.


7/12  Class III Futures:   Volume:  1085  Open Interest (OI) Change:  +76  Total OI:  26,654
7/12  Class III Options:   Est. Put Volume:  99   Total OI:  19,034   Est. Call Volume:  154  Total OI:  17,607
7/12  Spot Markets:   Block Cheese $1.54 (UP 1 1/4),  Barrel Cheese $1.51 (UP 1),  Butter $1.77 (UP  3/4),  NFDM: A $1.21 (UNCH),  X $1.23  (UNCH)
7/12  Other Dairy Futures Volume:   Butter:  80  Dry Whey:  9   NFDM: 13    Class IV:  0   Cheese:  5

7/12 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.455    UP .023                Vol:    1                      OI Change:  UP 1
Aug         $1.582    UP .022                Vol:    2                     OI Change:  UNCH
Sep         $1.604    UP .011                 Vol:    1                     OI Change:  UNCH
Oct          $1.60       UNCH                 Vol:   1                     OI Change:  UNCH
Nov         $1.569     UNCH                  Vol:   0                     OI Change:  UNCH
Dec         $1.568     UNCH                 Vol:   0                      OI Change:  UNCH

7/12 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.77     UP 13                   Vol:  118                 OI Change:     UP 7
Aug         $14.78     UP 25                   Vol:  488               OI Change:     DOWN 16
Sep         $15.00     UP 18                   Vol:  288                OI Change:     UP 26
Oct          $14.90     UP 6                    Vol:  82                  OI Change:     UP 5
Nov         $14.75      UP 5                    Vol:  33                  OI Change:      UP 2
Dec         $14.63     UP 6                    Vol:  12                  OI Change:      UP 8
Aug-Dec 2010 Avg:  $14.81                                        UP 0.12/cwt
Jan-Dec 2011 Avg:  $14.55                                          NO CHANGE

Source:   FCStone/Downes-O'Neill