Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
Class III and cheese futures limped into the weekend on low volume and inched upward on lethargic volume yesterday as well. While the futures markets are poised to the downside, the fact that we’ve spent the past two days consolidating from last Thursday’s dramatic decline tells us that the preponderance of bearish news is already baked into prices. Unless the spot cheese market drops ― and quickly ― we wouldn’t be shocked to see futures jump upward for a bit. The reality is different from logic, and it might very well not be for a few weeks that cheese makes a significant move lower, if at all.
That said, Mozzarella cheese demand in the country has been poor for weeks now, and from what we hear it appears as though Cheddar is not faring much better. However, the CME spot market still entices the buy side for a few reasons, among them maintaining a livable block/barrel spread. Stay on guard for some technical short-covering. But dairy products, in general, are bearish and Class III shouldn’t be able to remain an outlier to that forever. The real questions going forward are whether changes occur in farm-level production and the weather ― and whether a growing demand for dairy products start to take a material hold on traders’ perceptions in the next month or two. It’s too early to tell, but it’s also hard to make that argument today.
In the grain complex, corn sank early yesterday before coming back with strength; a recurring trend. In the afternoon crop progress showed that corn was 71% planted vs. 53% last week and compared to 32% last year and 47% on average. Soybeans are 24% planted vs. 12% last week and 6% last year and 11% on average. While those figures are nothing short of oppressively bearish planting figures, we still have a lot of growing season to truck through. And old crop corn and soybeans remain the drivers in today’s grain market
So, the above bearish (to price) planting numbers failed to ignite any sell off. A market the fails to react bearishly to bearish news must be respected as bullish, or at least somewhat bullish. People are worried about rationing of old crop, spot corn buying is strong, and China continues to worry market participants as well as longer term weather worries even after the crop is in the ground. It will likely be a long season. We suspect that when it is all said and done, we will have a large crop yielding lower prices. But getting there will be volatile and, at some point, will likely provide higher prices before lower once again.