Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III futures came roaring back from a pre-spot slump to power most months higher last Friday, but June and July closed lower leading the price changes for all months. Settlement prices ranged from down 15 in June to 11 higher in May, as just over 1,200 contracts changed hands. Open interest shifted up slightly on the day as traders contemplated future returns on the already heavily weighted class III market- note OI increased most in the declining months.
As expected, continuing robust production levels cast a dark shadow over thoughts of rising returns in coming months, while hedgers move to protect themselves against prolonged diminished returns for their product ― even as corn prices begin to look bearish. The outlook for returns on product remains skeptical, as more and more producers continue to apply hedges in anticipation of dropping prices. How long will the slide lower last is anyone’s guess, but with potential unseasonable weather patterns on the horizon, we may be in store for a brief rebound in prices for the nearby trading sessions.
The cold storage report was released after the close last Friday afternoon and in our opinion, the Cold Storage report was slightly bearish on cheese.
The cold storage report for cheese showed a larger-than-expected increase in American cheese inventories. American cheese stocks came in at 621.9 million pounds, up 2.3 percent from last month’s revised 607.7 million pounds, a 1.4-million-pound revision increase. Other cheese stocks were 382.6 million pounds, well below our expectation for 390.1. We have been hearing reports of increased export demand for mozzarella cheese from the West Coast so perhaps that, along with a slight production shift, led to the lower-than-expected stocks.
Total cheese production came in slightly higher than expected and climbed back to just above the one billion pound mark at 1.0045. That represents an increase of 1.6 percent over last month, though we are trailing last year by 2.4 percent. Based on this report, one would think that the spot market was showing a bit of weakness, but that hasn’t really been the case of late and interestingly many of the industry participants we talk to are looking for a potential short-term bump in the spot market. While we can’t justify that based on this report, much of the talk has also been that prices are likely to come under sharp pressure once buyer’s needs are met in the short term. We don’t expect to see much of a reaction to the report.