Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
The Class III market absorbed a bearish USDA Milk Production report and traded higher Tuesday. We’ve learned many times before to “be careful” when a market is not doing what you expect it to do. In this case, expectations were for weaker prices, but clearly the market is telling us that it has already priced in the burgeoning milk production picture for the time-being.
The big issue, then, is the spot market and the fact it stopped going down yesterday. Part of that is value-buying by domestic users. But the trade is keenly aware that U.S. cheese prices are running some 20 cents below the international market. Twenty cents has been the magic number to spur export business — the export bid for U.S. product. Traders expect this to be the case this time around and so futures — whether short-covering or new long positions going in — rallied yesterday. It is, however, not a foregone conclusion that export business will pick up with the pace we saw in 2011; for example, purely as a response to price. If those international markets don’t have the demand, they don’t have the demand. Right now, it seems those some phones have been ringing for product, but nothing to write home about. We will keep you updated.
Class III futures volume reached 1,167 contracts on the day which is moderate, but the early gains came on mostly lighter volume as just after the 1:10 settlement volume was under 850 contracts. The gains appear to have come mostly on short covering as open interest for all of Class III was higher. But all those increases were in 2nd half 2012, while 1st half 2012 saw open interest decline slightly. Although domestic buyers have stepped back into the spot market and may be able to move the market slightly higher in the short term, we don’t believe a rally will be sustainable given both what appears to be lackluster demand as a whole and growing milk production.
A surprising day of strong gains for the corn and wheat markets yesterday pulled up the soybean market as well. Both corn and wheat closed with double-digit gains — corn up 10.25 at 630.25 and wheat up 13.75 at 633.5. Those gains were enough to pull beans higher by the close after spending the majority of the day below unchanged due to stronger than expected rains for South America. Beans closed at 1220 up 2.5 cents on the day.