Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.
While the dairy complex was generally weaker Thursday, Class III futures consolidated amid lighter volume and finished modestly higher. While producer selling is light, commercial buy interest appears to be underpinning the market through the first half of 2012. Overall, the market was higher because of another good showing of support during the CME spot cheese trade, firm dry whey futures and an announcement of a reduction in dairy import tariffs imposed back in October 2010 from Mexico.
In a statement released yesterday, the U.S. Dairy Export Council reported, “On July 6, the United States and Mexico signed agreements that will end the long-standing dispute over cross-border trucking that caused Mexico to implement retaliatory tariffs on $2.4 billion of U.S. products, including a number of cheeses. Mexico will cut in half the retaliatory tariffs on all U.S. goods starting tomorrow. The remaining 50 percent will be suspended within five business days from when the first Mexican carrier receives authorization under the new program. Sources expect that to happen in August.”
There is often more than meets the eye when it comes to political negotiations and business, but we suspect that this announcement ought to provide some short-term support to deferred futures prices. At the end of the day, however, the trade will turn its focus back to the spot market for direction.
While there is no arguing both block and barrels prices have been resilient so far this week, there is also no arguing that cheese is shaking finally shaking loose at these levels. Ten loads of block cheese traded between unchanged and .50 cent lower yesterday and finished back at unchanged. That makes 17 loads of block cheese that have traded thus far this week — the most since the final week of April where 19 loads of blocks were traded. Not to be outdone, the barrel market rose a 0.25 cent on one trade.
Although cash price support is present this week, we continue to expect that spot prices are vulnerable to more downside pressure from these levels. Manufacturers are pulling in the reins on cheese production at these prices, and we are hearing of $2.00 and $3.00/cwt discounts on milk in the western U.S. Add to that a general weakness in Class IV products, and the argument for Class III strength over the next few weeks is waning.
This morning, we look for Class III to open slightly higher, for spot to be steady to lower and for futures to close lower.