Class III under pressure ahead of production report

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Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.

Class III prices gave up some recent gains, as both end of the week-long liquidation (profit-taking) and fresh producer selling weighed on the market. Prices pushed higher out of the gate on both follow-through buying from the prior day as well as slightly higher NASS dry whey and cheese prices. But that strength waned after spot cheese sat steady for the second day in a row.  When the dust settled Friday, however, the April to June Class III average had gained 37 cents on the week to finish at a $15.73 average. In keeping with a tone of firming futures prices, the July to December pack average gained 26 cents on the week, resulting in a $16.60 average.

Last week was marked with many questions not the least of which was: “How can prices be going up with all this milk around?” While it’s not an easy answer, there are three main reasons: (1) shift of focus, (2) dry whey price increases, and (3) continued commercial buying.

During the past week, both the block and barrel cheese prices have risen 9 cents and 8 cents, respectively, though nary a single load has traded hands. The increase in spot prices, driven largely by an increase in demand for processed cheese, as well as anecdotal evidence of an uptick in export business, has demonstrated that sometimes milk production takes a back seat to vagaries and imbalances in the supply/demand equation for fresh cheese. Add to that a firming dry whey futures market and sprinkle on continued commercial buy interest and you have a higher-priced milk cocktail regardless of milk production.

The real question then is not, how is it possible we rallied with all the milk? But rather, “how long can we really stay up here?” With February’s USDA Milk Production Report staring us square in the face today, its short-sighted to think that the focus won’t shift back to milk supplies if only for a short while this week.

In the grain complex, the unseasonably warm weather in the Corn Belt has shifted thoughts over the past week from the benefit of being able to get in the fields early to the potentially hot dry summer that lies ahead. The trade has taken to the bullish side of that — trade grain prices across the board have edged higher. So, we are in crop killing mode currently, and with that we can expect a firm tone to the complex with intermittent selling headwinds as the U.S. dollar gains traction to the upside as well. To us, is seems more like premium building ahead of the March 30 Planting Intentions Report and a disbelief in China’s “we will not add inventories” mantra of late. Is it wise to bet against what China says?  Who knows, but the Dalian corn prices set a new record last week, with bean prices also strong.

Grain end-users ought to be looking at options. In particular, buying put options against purchases and/or futures purchases.

We look for corn to open 6 to 8 cents lower and for beans to open 7 to 9 lower.

Daily CME spot market prices:

Block cheese $1.5825 (unchanged)

Barrel cheese $1.5825 (unchanged)

Butter:  $1.515 (unchanged)  

Grade A NFDM: $1.2675 (unchanged)

These data and 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.




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