Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
The Class III futures finished off a largely lower week on a mixed note, with trading volume registering at just over 700 contracts.
It’s been a quiet June so far (recent futures volatility notwithstanding), and quiet markets tend to favor price weakness. Nearby Class III futures dropped between 50 and 60 cents during the course of last week, giving back all of the prior week’s gains primarily due to the three-cent drop in the price of block cheese and aided by general outside commodity market softness. Blocks now rest five cents below barrels at $1.7225. While a seasonality argument can be made for the inverted spot structure, we continue to hear of fresh supplies of both block and barrel cheese. Expect additional spot sales for blocks in particular, but be watchful of spot buyers. Buyers still see value at current levels and will not likely walk away from cheese this week.
Part of our thought-process here is that there seems to be some psychological support to the spot and futures forward curve as market participants keep a short leash on bearish sentiment. Until we either get a cooler-than-normal U.S. summer, see some easing to the European flooding problems (which haven’t hampered milk production yet but has kept animals out of pasture), or get some assurance that New Zealand's weather problems are safely a thing of the past for 13/14 season, the market is in limbo between heavier inventories, quieter demand, and largely weather-related uncertainty of future milk supplies and future export demand.
Spot Session Results
Block cheese: $1.7225 (unchanged)
Barrel cheese: $1.7725 (unchanged)
Grade A NFDM: $1.7025 (up 0.25 cent)
Butter: $1.535 (down 0.5 cent)
Corn and soybeans/meal finished last week on slightly higher note, but with a lack of conviction on light volume and carried predominantly by old crop price support/tightness.
The markets are in the process of shifting focus from the acreage debate to yields. It only takes a 1.5 bushel yield loss to equal losing about 1 million acres. At this point, any reduction in yield will quickly have traders perceiving ending stocks as “tight” instead of a surplus. We expect further weakness in the short-term for corn and bean futures, but do not expect established long-term direction until we roll in to July or later. Those who have agreed to buy physical corn ought to look at puts to protect. For end users, if you do not want to go the physical route just yet (perhaps due to basis), we suggest looking at buying call options or min/max’s on futures price weakness.