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

The $2 cheese bell has been rung with a lone trade occurring at that price. Fanfare, however, did not spread into the Class III futures. A paltry 589 contracts traded hands and what little firming to futures prices there was early in the session evaporated by the end of the day as Class III prices closed slightly lower across the board. The Class III trade yesterday was the personification of everyone’s nervousness with a $2 cheese price on a board. Even a sharply higher butter trade was not enough to wage war on the doubt Class III market participants have in sustaining current cheese sales at these levels. We look for a mixed trade early this morning.

CME spot butter reversed course in a big way yesterday. Buyers pushed cash prices higher looking for an offer and when they found it, they stopped. But the nervousness from the commercial butter buy side is palpable and it is clear that the story from January has not changed — they do not have the inventories they need right now. Butter futures volume spiked propelling prices 3.5 to 5 cents (limit) from March to June. Futures prices are making fresh highs, so the expectation here is for additional strength here this week.  Look for a steady to firm opening this morning.

The USDA Dairy Products Report released yesterday validates most of the market activity in January and beginning part of February in terms of production. The one category that continues to raise eyebrows is the American cheese production. According to the USDA, production there is up 4.4 percent from last year and noticeably above the 5-year average. The take away from the USDA reports over the past two months is truly that — so long as dairy product demand remains strong — we cannot afford to have any type of milk supply disruption in 2011. There will be ebbs and flows in the demand equation, and as far as this commentary is concerned, we are likely setting the stage for a slow-down in demand for certain products, namely cheese.

The challenge of turning a profit for dairymen has become no less murky here even with such a sharp rise to milk prices due to the costs of doing business.  Producers have been asking what they should do to protect themselves or if they even should. The recommendation is where you can lock up a profit margin on a portion of your production, do so.

If you are bullish and want to postpone the sale of milk, look at put options.  Don’t spend an arm and a leg on them, but rather look at levels that protect a worst-case scenario price you are comfortable with.  There may be much more room to the upside for milk here this year, but the key is to bring some level of certainty back home. 

Corn sold off sharply yesterday after scratching out a new trading price high early. Market bulls wanted to take some money off the table ahead of today’s export sales numbers (the same report that helped stirred prices sharply higher last Friday). Soybean traders leaned on a slow South American soybean harvest over the past few days. The crop is approximately 28 percent harvested, but this is significantly behind last year’s pace when more than half of the soybeans were harvested by the end of February. Of course, they had a late planting down there so a late harvest is to be expected.

Export sales were stronger than expected for grains and soy this morning, but only marginally so.  Corn and soybeans are called 2 to 4 cents higher. 


3/2  Class III Futures:   Volume:  589 Open Interest (OI) Change:  +82  Total OI:  40,672
3/2 Class III Options:  Est. Put Volume: 731 Total OI:  39,999 Est. Call Volume: 1,016  Total OI:  28,399
3/2  Spot Markets:   Block Cheese $1.2000 (UP 1/2, 1 Trade); Barrel Cheese $1.9625 (UP 1, 1 Trade)
Butter $2.1150 (UP 9 1/4, 1 Trade); NFDM: A $1.8150 (DOWN 3/4, 0 Trade), X $1.8025 (UNCH, 0 Trade)
3/2 Other Dairy Futures Volume:   Butter:  206   Dry Whey:  16  NFDM:  54   Class IV:  19  Cheese: 63  International SMP:  0 

3/2 Individual Class III Futures Prices, Change, Volume & Open Interest

Feb 11     $17.07                 DOWN 1               Vol:   0                   OI Change:     UP 2
Mar 11    $19.47                UP 3                       Vol:   109              OI Change:     UP 20
Apr 11     $18.07                DOWN 4               Vol:   160              OI Change:     UP 14
May 11   $17.37                 DOWN 13             Vol:   34                OI Change:     UP 6   
FEB-June 2011 Avg:     $17.78             DOWN 0.05/cwt
July-Dec 2011 Avg:      $16.85              DOWN 0.10/cwt
FEB-Dec 2011 Avg:       $17.27              DOWN 0.08/cwt

These data and these comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.

Source:  FCStone/Downes-O'Neill