Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
For the first time in months, open interest soared on a big price-declining day and it appeared that after having been quiet, producers came in selling yesterday. Nearly 400 of the 1,928 Class III contracts that traded Thursday did so Wednesday night in an unusual display of activity in the deferred contracts of 2012. We suspect that it was commercial buy interest that kept prices busy and eventually led to a firm opening for the nearby Class III contracts. For the 2011 contracts, however, that all faded as prices turned lower by mid-day and we expect the selling pressure likely had little to do with the concurrent stock market crash.
Instead, traders were dealt a one-two punch of largely weaker USDA International prices and a slightly weaker CME spot block, which drifted 1.75 cents lower uncontested by buyers. Additionally, the Bank of Japan announced the flexing of their own monetary muscle this week, which weakened their currency to entice export business. This helped propel the U.S. dollar skyward and provided a stiff headwind to U.S. commodity markets in general.
Class III prices fell to key areas of technical support, but by the end of the day 2011 contracts still finished 13 to 26 cents lower with the exception of July and August. 2012 prices remained propped by consistent buy interest and another day of quiet producer sell interest in a steeply discounted forward futures curve. Until futures trade below more meaningful levels of technical support, Class III prices are likely to be choppy.
Market bulls continue to lean on the weather and available milk supplies tightening as schools gear up for fall session. Schools re-opening and competing with cheese manufacturers for available milk is a concern every year. This year will be no different and, given some production short-falls, school demand may have a more important impact on tightening up supplies. For the time being, however, it appears as though this concern has already been priced into the futures market — and potentially the CME spot market.
Having run out of gas from Tuesday’s limit-up move in corn, grain market bulls have fought an uphill battle for the past two days. As for yesterday, however, the sharp rally for the U.S. dollar was just the start of the negative trader bias. Export sales, too, left market bulls holding the hot potato.
Traders have already baked in the lowest of corn yield estimates, Informa estimates released yesterday were bearish to the market with their yield estimates well above what the market expected and not all that far behind the USDA. Throw on top of that the economic meltdown that QEI and QEII staved off, and you have a sell-market that still is just chopping around and not showing any true trend, but with a technical formation appearing like a possible double top.