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.

Without movement in CME spot cheese and butter and beautiful summer weather across most of the country, traders were mostly absent from the market yesterday and we expect more of the same today.   Class III futures barely managed break the 300 contract barrier and the rest of the dairy market trading activity was also light.   For the second straight session, near month futures did manage to post modest single-digit gains, but light selling in 2011 futures continue to bring down the average in those months.   Overnight trading stands at just a handful of contracts across the entire complex, and unless we see movement in spot prices today, it could be another quiet day to close out the week.  

CHEESE and MILK BUYERS:   We mentioned the dry whey prices shooting up like a cannon in the second half of 2011 and follow through bids brought the futures average out there to nearly 41 cents yesterday!   The strength of dry whey futures in those months has brought down the "synthetic cheese" price for all of 2011 into the low to mid $1.50s.   Ordinarily we don't see commercial hedging occur that far into the future until near Labor Day.  But if the dry whey price holds in those months, we believe the market has presented a reasonable opportunity for cheese users to get an early shot to lock up a percentage of their usage for the entire calendar year.

CME spot butter remained quiet for the second straight day at $1.71, and futures began to sell off on light volume.  July-Nov futures finished 1/4 to a penny lower, though December futures did spike two cents higher to get in line with the other 2010 months.  We don't see much weakness in this market in the near term.

USDA released the weekly dry whey numbers and in contrast to the 2011 futures trade, Central mostly midpoint price remained unchanged at $.3450 and Western mostly down fractionally at $.3875.   This morning's NASS figure was $0.3718 on strong volume, up $0.0037 from the previous week.

Also released was the USDA weekly dairy cow slaughter report yesterday with 48,900 head culled for the week ending June 12.   While that number is 19 percent behind the corresponding week last year due to CWT culling in June 2009, it represents an 11.6 percent gain vs. 2008.   Year to date, dairy cow slaughter is only 4.2 percent behind 2009.  The upcoming CWT herd retirement program that is set to take out cows in July may bring the year to date total above last year for the first time this year.   CWT bids for the next retirement round need to be postmarked by TODAY to be valid.

Grain complex prices have been under pressure all week and while we expect a slight, short-covering related bounce soon, grain markets are getting little news leaving weather as the dominant influence.  The longer-term forecast is short and sweet: the weather will be near perfect for growing crops in the Corn Belt during the next couple weeks.  Most forecasts call for slightly cooler and dryer air over the 6 to 10 days.  We would like to wait for further declines before buying more call options as upside protection, but we've also been around the block a time or two and seen how quickly benign weather forecasts can change.  We suggest to producer customers owning $3.80 September corn calls for 10 cents or better against purchases for the next two months.


6/24  Class III Futures:   Volume:  323  Open Interest (OI) Change:  +37  Total OI:  28,969
6/24  Class III Options:
  Est. Put Volume:  246   Total OI:  21,270   Est. Call Volume:  194  Total OI:  20,273
6/24  Spot Markets:
  Block Cheese $1.3975 (UNCH),  Barrel Cheese $1.37 (UNCH),  Butter $1.71 (UNCH),  NFDM: A $1.25 (UNCH),  X $1.2450  (DOWN 1/4)
6/24  Other Dairy Futures Volume:   Butter:  24   Dry Whey:  13    NFDM:  6    Class IV:  0   CHEESE:  19

6/24 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul - $1.423               UNCH                Vol:  0                OI Change:  UNCH
Aug - $1.471        DOWN .003        Vol:  5                OI Change:  UP 5
Sep -$1.53        UP .01                Vol:  10        OI Change:  UP 10
Oct - $1.55              UNCH                Vol:  0                OI Change:  UNCH
Nov -$1.55               UNCH                Vol:  2                OI Change:  UP 2
Dec -$1.55               UNCH                Vol:  2                OI Change:  UP 2

6/24 Individual Class III Futures Prices, Change, Volume & Open Interest
Jun - $13.59      UP 2                Vol:  2                OI Change:  DOWN 3
Jul - $13.30        UP 5                 Vol:  50                OI Change:  DOWN 39
Aug - $13.62      UP 3                Vol:  71         OI Change:  UP 6
Sep - $14.35       UP 4                Vol:  38          OI Change:  DOWN 2
Oct - $14.63       UP 5                Vol:  25                OI Change:  UP 4
Jul-Dec 2010 Avg:  $14.15                      UP 0.02/cwt
Jan-Dec 2011 Avg:  $14.51
                  DOWN 0.05/cwt

Source:  FCStone/Downes-O'Neill