Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O’Neill in Chicago, Ill.
The news out of New Zealand concerning DCD proved to be active conversation, but limited follow-through in terms of trade activity. In fact, this is a PR problem, yes, but not much of an actual problem. Less than 4 percent of the farms in New Zealand use DCD, and DCD was only found in milk production for September with NO traces for Nov or Dec. The suspension of DCD sales limits future risk, if not eliminates it. Since there is no global standard concerning DCD, few if any trade partners will walk away; realistically there isn’t anyone else to walk to for total supply needs if it is anything but a small volume. There will probably be some limited disruption to dairy exports, but it is product flow not volume of sales that will be disrupted and while buying U.S. and selling NZ seems appropriate (think CME and NZX), it probably isn’t a run-away trade with the current facts in hand. Additionally, the recent string on bearish U.S. cold storage and milk production reports has put U.S. prices in check, and NZX futures have thus far failed to show any meaningful response to the DCD news. In the long-term, it is undeniable this will underpin the already strong conversation of food quality, traceability and supply chain diversification, but that is long-term in impact and action and already under way. Ultimately, for now, the strongest message is that DCD is not toxic to humans in low levels such as has been found.
Class III and cheese futures started yesterday soft, and they weakened further throughout the day. Early on, it was soft corn prices that helped subdue the bulls ― the corn price ultimately reversed course and closed higher ― then later in the day it was the sluggish spot session which showed cheese barrel prices falling to below $1.60 ($1.5725) for the first time since June 19.
There has been increased talk of cheese in the $1.40’s, and while that is overdoing it in our opinion, markets are certainly known for overdoing it in any direction once they start moving strongly.
It was a big-volume day with over 1,600 Class III futures contracts traded and over 1,200 Class III options. Cheese futures, too, were rather active with nearly 300 of those futures trading and, as we have often said, volume more often than not confirms price direction and yesterday was lower. Let’s wait and see if there’s follow and reserve some more judgment than normal here today because of all the news out recently.