Class III Futures Incurs Losses on Correction; CME Spot Barrels Fall ¼ Penny

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010144.pdf

7/28  Class III Futures:   Volume:  1232  Open Interest (OI) Change:  -14  Total OI:  28,931

7/28  Class III Options:  Est. Put Volume:  383   Total OI:  20,790   Est. Call Volume:  270  Total OI:  19,222

7/28  Spot Markets:   Block Cheese $1.6025 (UNCH),  Barrel Cheese $1.5575 (DOWN 1/4),  Butter $1.80 (UNCH),  NFDM: A $1.21 (UNCH),  X $1.2250 (UNCH)

7/28  Other Dairy Futures Volume:   Butter:  16  Dry Whey:  134   NFDM: 34    Class IV:  0   Cheese:  16

7/28 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul           $1.456     UNCH                Vol:    0                   OI Change:  UNCH
Aug         $1.584      UNCH                Vol:    0                  OI Change:   UNCH
Sep         $1.626      UP .003              Vol:    0                  OI Change:   UNCH
Oct          $1.611       DOWN .002        Vol:    1                 OI Change:  UNCH
Nov         $1.583      DOWN .006        Vol:    2                 OI Change:  UNCH
Dec         $1.580      DOWN .006        Vol:    1                  OI Change:  UNCH

7/28 Individual Class III Futures Prices, Change, Volume & Open Interest
Jul           $13.75    UP 1                  Vol:  6                    OI Change:     UNCH
Aug         $14.89    DOWN 11        Vol:  288                OI Change:     DOWN 103
Sep         $15.30     DOWN 12       Vol:  248                OI Change:     DOWN 34
Oct          $15.01     DOWN 19        Vol:  154                 OI Change:     DOWN 32
Nov         $14.73     DOWN 20       Vol:  201                OI Change:     UP 18
Dec         $14.70     DOWN 10        Vol:  170                OI Change:     UP 58
Aug-Dec 2010 Avg:  $14.93                                       DOWN 0.14/cwt
Jan-Dec 2011 Avg:  $14.60                                        DOWN 0.01.cwt

Class III futures opened firm yesterday only to begin losing value heading into the CME spot cheese market.   Spot cheese sellers offered blocks and barrels for the fifth consecutive session and the trading activity and players were familiar, but when it was all over, barrel prices fell ¼ penny and futures followed suit.   Volume was firm at over 1000 contracts and we were impressed with volume spread out evenly Aug-Dec 2010.   Overnight, Class III is trading mixed on light volume.   We look for another morning of traders consolidating positions to prepare for the spot market to provide our day’s direction.  

So what do we make of Class III futures’ first real negative trading session in eight days?  So far there is no evidence suggesting that the futures market is poised for a sustainable decline and we’re calling yesterday’s activity corrective in nature.  Anecdotally, physical traders we speak with are not telling us that CME spot prices are out of sync with the rest of the country.  Looking at the technical charts, no major support lines were broken through during yesterday’s losses and most months bounced off their intra-day lows.  Most important, open interest declined Aug-Oct meaning that traders were removing more positions than adding yesterday – a likely sign of long liquidation.   We continue to believe that CME spot cheese prices represent fair value in the short term and will be well-supported at these levels into August.

Tuesday, USDA released its May commercial disappearance to provide the industry with a look back at broad demand numbers.  Ending in May, year to date American Cheese disappearance is down 0.6%, but Total Cheese disappearance is up 2.5 percent.  Year to date Butter and NFDM usage was also up 1.3% and 15.4%, respectively.  The most interesting part of this dated report is that imports were down sharply in most categories.  American cheese imports are down by 69%, total cheese is off 32% and NFDM imports declined by 96% year-to-date.  Butter imports are actually up 3% for the year.  While these numbers suggest a burgeoning demand situation so far in 2010, the report itself often does not directly impact dairy futures prices.  From a trading perspective, it is the equivalent of driving your car by looking through the review mirror.   

Stronger grain prices in Europe spilled over into the US markets yesterday with wheat futures leading the charge trading as high as 27 cents per bushel higher and establishing a new 2010 high.  Earlier this week, the Russian Ag Ministry denied speculation that it would restrict grain exports in the face of an historic drought, officially saying it had not sent any restriction proposals to the government.  This comes on the heels of a statement last week by the same Ministry reporting that drought killed crops on 10 million hectares, or nearly a quarter of the planted area.   From where we sit, conflicting ideas and stories out of the former Soviet Union have officially run amuck.  Prices tend to rise on amuck.

All of the speculation and mixed news out of Europe and Russia, however, will not change what continues to be exceedingly impressive US crop growing weather.  Such weather ought to keep a lid on corn prices in that $4.00/bu area until we can sort out the news that brought us here in the first place.   Moreover, we are wrapping up the end of the month and the end of the second quarter, so we expect an increase in overall volatility.  Look for a firm opening in the grains to start today.