Quiet spot markets lead to a choppy trade

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

Another in a strong of sessions in which volume and open interest increased on the way down, following subdued volume and open interest decreases during a previous higher price trading session. Class III traded mostly lower Thursday on heavy trading volume. More than 2,200 contracts traded hands in as prices largely gave up Wednesday’s gains. Unless you were watching April, which not only garnered over 40 percent of the entire trading volume (932 contracts), but also finished up a nickel on the day. In fact, the April-May spread unwound to as much as $1.25 intraday and finished at $1.10. 

The futures market is not wrong to work sizable discounts going forward as the crowd expects that our milk supplies will soon be a dark cloud over the Class III market once we can put some short-term cheese tightness/demand to bed.  But if a spot market decline is imminent, then April — having only logged its first week of pricing for NASS — ought to collapse, too. Given the trade yesterday, we still expect more stability for spot to finish out the week.

Yesterday’s Cold Storage Report may also feed some bullish fire for the near term — or at least it supports the recent move. American cheese stocks came in at 606.30 million pounds, down 14.7 million pounds from last month despite the strong milk production. This indicates to us continued strong demand for American-type cheese, though we’re unsure how much further this can push the current market prices.

Other cheese inventories saw a large bump, up 3.9% month over month much larger than estimated coming in at 381.09 million pounds. Poor pizza demand, as well as a seeming shift from American cheese production into other cheese, seems to be to blame for the greater-than-expected increase.

Rain makes grain. And early planting also makes grain. And the mixture of the two in various regions of the country has been enough to zap the bull’s enthusiasm for winning acres over the past few days.  There is a historical relationship between early planting and high yield — keep that in mind. In order to make new highs, traders need to get worried again about the crop, and for now fears have calmed. The market ought to build back in some risk premium ahead of next week’s USDA Prospective Plantings Report and Stocks in all Positions Report, which will allow analysts to estimate crop demand for the 1st half of the marketing year make forecasts.  But, for now, look for more of a choppy trade to persist. 

We look for corn to open 4 to 6 cents higher and for beans to open 15 to 17 higher.

Daily CME spot market prices:

Block cheese $1.635 (unchanged)

Barrel cheese $1.625 (unchanged)

Butter:  $1.5225 (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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