Spot and futures converge slightly on Tuesday

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

The spot market continued to bounce yesterday as barrels spiked 4.5 cents higher and blocks attempted to come along, gaining 1.5 cents, and in the process blocks settled above the $1.50 mark for the first time since Jan. 31. Sellers were once again absent, which was unexpected given the sizeable gains and from what we’ve been hearing relative excess of blocks available on the market. The inverted spread is somewhat expected, given the reported tightness in the barrels but we wouldn’t expect the spread correction to be too drawn out.

Yesterday, a day where the spot market moved higher, we saw significant declines on futures and relatively stronger volume than was seen on Monday’s higher prices. Just over 1,200 contracts traded vs. the 800+ on Monday and prices were mixed with March and April 4 and 2 higher, respectively, while May closed down 22 cents, June and July lost double digits and August through March 2013 were mixed from -2 to +12.

But due to the evening of the Q2 spread, we are careful not to expect long, drawn out price declines for Class III right now. While futures prices lacked the movement to back up the spot price increases yesterday, some we’ve talked to believe the gains in spot can push toward 1.60, perhaps even above, which would result in more upside for futures as well. For now, however, we expect nearby futures to trade with a negative bias and a more choppy trade. Over the next 30 to 60 days, we will likely see the downtrend for Class III return as spot buyers get their fill and global milk production figures take hold once again, but it does not appear to be a grave concern for today’s trade.

Soybean prices took the lead rope from the get go yesterday, pushing to double-digit gains early and dragging corn and wheat reluctantly higher on continued fears of South American crop loss. Corn broke above its recent high very briefly, but failed to trigger buy stops above the 665 mark and failed to hold above that into the close, ending the day at 662 up 2.5 cents. Beans were some 5 cents off of their intra-day highs closing at 1348.75 up 14.25 cents,

New crop corn prices were under pressure as Elwin Taylor, an Iowa State professor, called for a 60% chance of record 168 crop yield for the upcoming year, this likely triggering a carryout over 2 billion bushels which certainly would have a very bearish impact on new crop prices. December corn closed down a penny at 567.5. The market longer term is left to trade the weather prospects for the upcoming summer, a game which we greatly dislike. Our feeling is that too much weather risk is currently priced into the new crop values, in part, because of the old crop market tightness but also due to the fact we’ve seen two consecutive years of sub trend yields. A third consecutive year of sub trend yields seems fairly unlikely to us at the current juncture but it has happened before.

We look for corn to open 2 to 4 cents lower and for beans to open 2 to 4 higher.

Daily CME spot market prices:

Block cheese $1.5075 (up 1.5 cent)

Barrel cheese $1.5525 (up 4.5 cents)

Butter:  $1.4975 (up 3 cents)  

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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