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 mixed yesterday in quiet fashion to close out the month with firmness in the fourth quarter and quiet, mixed results in 2011.  CME spot cheese and butter markets were also quiet and failed to provide traders any direction.   Traders are still quite skeptical and feel that spot prices are due for a downward correction and are keeping a decent discount in the futures market intact.  November was able to settle 18 cents higher to finish at $15.92, but that is still nearly $1.00/cwt away from the current spot price of milk which we have pegged at $16.85 based on current CME block, barrel, butter settlements and the October dry whey futures price.

We are still of the opinion that there is potential for spot cheese and butter prices to correct over the next week or two, but with the futures curve already factoring in a decent drop, we believe that prices don’t have much further to fall before finding ample support.  Remember, the current structure of the Class III market is bullish.  Overnight trading has been light and mixed this morning and we expect futures to trade sideways until we get to the spot market for more direction.   

Federal Order Class prices will be announced at 9AM this morning by the USDA-AMS.   Based on our calculations, September Class III will be announced at $16.26 (up $1.08 vs. last month) and Class IV at $16.76/cwt (up $1.15 vs. Aug). California also announced their monthly Class prices with 4b coming in at $15.48 and 4a at $16.61.

USDA released dairy cow slaughter numbers yesterday showing the first percentage increase vs. last year in six weeks.   For the week ending Sep 18, 56,700 head were sent to slaughter, up 3.8 percent vs. last week but still running behind 4.5 percent 2009 year to date.   In the Upper Midwest, Region 5 has posted three strong weeks of slaughter with a 17.1 percent avg increase vs. last year, but the Western region (includes CA, AZ) has slowed considerably, down an average of 25 percent vs. 2009 over the past six weeks.  While Upper Midwest production has struggled over the past two months due to summer heat, California production continues to hum along at a fairly swift pace vs. 2009.

Weekly dry whey prices were published yesterday morning with the Western mostly midpoint price at $0.3775, up ½ penny vs. last week.  The Central mostly price came in unchanged at $0.3425.   The Western commentary notes that the market has a firm undertone and a number of buyers are reporting having trouble finding enough whey to meet current needs.   Whey production nin the US continues to trail volumes for the previous four years.   This is likely due to the whey stream shift from commodity dry whey to more value added whey proteins by many cheese manufacturers.

USDA will release the August Dairy Products report Monday that will give us a look into what finished goods were manufactured with the milk that was produced.  We are looking for American cheese production to be up nearly 3 percent and total cheese production to be nearly 4 percent higher vs. Aug 2009.   We are also looking for butter production to increase slightly year over year after 12 straight months of declines. 

Traders expected corn stocks to decline from by 266 million bushels from last year but instead were surprised to see stocks increase by 35 million resulting in a 301 million bushel swing from the average trade guess!  Market bulls cited the possibility that some of the early harvest this year has been factored into this grain stocks report.  This may have provided enough to keep the market from trading limit down, but it is highly unlikely in general and specifically after the USDA announced late yesterday that there was no news crop in the report

Yesterday’s report may well be a game-changer for the prognosticators calling for $6.00 corn by the end of the year.  Next Friday we will get the Crop Production report for September.  There should be no change in terms of stocks in that report.  It will be about yield.  And market bulls better hope it comes in shy of a 160 bu./acre yield.  Look for a weak opening to the grain complex this morning.  As we flip the calendar to October, it could be a volatile Friday.

9/30  Class III Futures:   Volume:  502  Open Interest (OI) Change:  +186   Total OI:  28,098
9/30  Class III Options:  Est. Put Volume:  260   Total OI:  22,648  Est. Call Volume:  387  Total OI:  18,427
9/30  Spot Markets:   Block Cheese $1.76 (UNCH),  Barrel Cheese $1.7350 (UNCH),  Butter $2.2350 (UNCH),  NFDM: A $1.23 (UNCH),  X $1.2250 (UNCH)
9/30  Other Dairy Futures Volume:   Butter:  54  Dry Whey:  13  NFDM:  0  Class IV:  0   Cheese:  0   International SMP:  0

9/30 Individual Class III Futures Prices, Change, Volume & Open Interest
Oct        $16.62                UP 7                     Vol:   85                OI Change:    DOWN 4
Nov       $15.92                 UP 18                   Vol:   127              OI Change:    UP 59
Dec       $15.05                 UP 7                     Vol:   79                OI Change:    UP 12
Jan 11    $14.38                 DOWN 1             Vol:   29               OI Change:     DOWN3
Feb 11    $13.86                UP 3                     Vol:   23               OI Change:    UP 12
Oct-Dec 2010 Avg:  $15.86                   UP $0.10/cwt
Jan-Dec 2011 Avg:  $14.38                   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