Editor’s note: This market commentary is provided by Dave Kurzawski and Eric Meyer, risk-management consultants with FC Stone/Downes-O’Neill, Chicago.

Heavy snow with lots of wind has brought a good old fashioned, batten-down-the-hatches winter storm to the Midwest over the weekend. Icy roads and blowing snow will make moving milk in the Midwest challenging for at least a few days. So far there are no reports of milk production losses. But it is early and we know that Midwest cows will need to eat heartily in order to maintain production through this cold, stormy snap in weather. Even then production losses may occur.

So far weather hasn’t wreaked havoc on the futures market with Class III futures overnight trading mixed and quiet. The bigger issue is the weight of cheese that has pressured both CME spot blocks and barrels over the past week. With the holidays approaching, demand will likely be quiet until there is a semblance of pipeline refilling we suspect may not come until after the holidays have passed. We believe there could be additional pressure to cheese prices, but ultimately more of mixed trade in the short-term. While there may be a little more pressure on Class III futures this morning, the velocity of the futures sell-off has waned and likely run its course to the downside for the time being.

The second half of 2011 Class III, which has been trending higher since September, appears poised for some type of move. We suspect it will be a corrective move to the downside; one that will tighten the spread between Jan-Mar & July-Sep.

Dairy export totals for October were released on Friday. We will publish those figures to you later this morning, but overall the volumes continue to be strong heading into the fourth quarter. Most impressive are NFDM exports, up 103 percent vs. October 2009 as well as Total and Cheddar cheese, up 50 percent and 147 percent, respectively over last year.

The butter futures market continues to show strength in the futures curve throughout 2011, with Mar-Nov futures settling above $1.70 on aggressive bids and moderate volume. Dairy Market News indicated last week that export demand is developing and increasing in interest, likely keeping a firm undertone to the market. As we reach year end, spot butter prices should ease a bit but with the global supply/demand fundamentals still pointing more bullish in nature, we still expect futures to find decent support in the $1.60s.

The Chinese economy is still running on overdrive with the key Consumer Price Index (CPI) released over the weekend showing an increase of 5.1 percent – the sharpest rise in three years. Anyone who wasn’t living under a rock over the past three years should be wondering when China’s number will be called. Analysts are generally looking for a slow-down in the Chinese economy by mid-2011, but as we all know too well economic slowdowns are not that easy to predict.

Here on U.S. soil, the USDA report came and went with little fanfare. The market action said that news is well-priced in fact with nearby corn futures closing unchanged on the day. Argentina’s dry October, November and December should have some influence on corn yields although the USDA did not change estimates and they normally don’t in December anyway. We look for a firm opening and some choppy trading as the market looks for direction.


12/10 Class III Futures: Volume: 1,441 Open Interest (OI) Change: +637 Total OI: 30,017
12/10 Class III Options: Est. Put Volume: 450 Total OI: 22,489 Est. Call Volume: 439 Total OI: 21,538
12/10 Spot Markets: Block Cheese $1.3900 (DOWN 2 1/2, 5 Trades); Barrel Cheese $1.3475 (DOWN 3, 10 Trades)
Butter $1.6200 (UP 1, 0 Trades); NFDM: A $1.2350 (UP 1/2), X $1.2250 (UNCH)
12/10 Other Dairy Futures Volume: Butter: 76 Dry Whey: 81 NFDM: 1 Class IV: 0 Cheese: 108 International SMP: 0

12/10 Individual Class III Futures Prices, Change, Volume & Open Interest
Dec              $13.80         UP 2           Vol: 130            OI Change:             UP 61
Jan 11          $13.02        DOWN 6     Vol: 367            OI Change:             UP 137
Feb 11         $13.16        UNCH         Vol: 304            OI Change:             UP 195
Mar 11         $13.66        UP 4           Vol: 129             OI Change:             UP 39
Apr 11         $14.05        UP 3            Vol: 86              OI Change:             UP 52
Jan-June 2011                                    Avg: $13.79                      UP $0.01/cwt
July-Dec 2011                                    Avg: $15.36                      UP $0.03/cwt
Jan-Dec 2011                                     Avg: $14.58                      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