Editor’s note: This market commentary is provided by Dave Kurzawski, risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.
The $2 cheese bell has been rung with a lone trade occurring at that price. Fanfare, however, did not spread into the Class III futures. A paltry 589 contracts traded hands and what little firming to futures prices there was early in the session evaporated by the end of the day as Class III prices closed slightly lower across the board. The Class III trade yesterday was the personification of everyone’s nervousness with a $2 cheese price on a board. Even a sharply higher butter trade was not enough to wage war on the doubt Class III market participants have in sustaining current cheese sales at these levels. We look for a mixed trade early this morning.
CME spot butter reversed course in a big way yesterday. Buyers pushed cash prices higher looking for an offer and when they found it, they stopped. But the nervousness from the commercial butter buy side is palpable and it is clear that the story from January has not changed — they do not have the inventories they need right now. Butter futures volume spiked propelling prices 3.5 to 5 cents (limit) from March to June. Futures prices are making fresh highs, so the expectation here is for additional strength here this week. Look for a steady to firm opening this morning.
The USDA Dairy Products Report released yesterday validates most of the market activity in January and beginning part of February in terms of production. The one category that continues to raise eyebrows is the American cheese production. According to the USDA, production there is up 4.4 percent from last year and noticeably above the 5-year average. The take away from the USDA reports over the past two months is truly that — so long as dairy product demand remains strong — we cannot afford to have any type of milk supply disruption in 2011. There will be ebbs and flows in the demand equation, and as far as this commentary is concerned, we are likely setting the stage for a slow-down in demand for certain products, namely cheese.
The challenge of turning a profit for dairymen has become no less murky here even with such a sharp rise to milk prices due to the costs of doing business. Producers have been asking what they should do to protect themselves or if they even should. The recommendation is where you can lock up a profit margin on a portion of your production, do so.