This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.
The class III market traded both sides of unchanged on Tuesday opening higher and seeing gains of as much as 19 cents in August prior to the spot session. While we continue to hear talk of a lack of barrel availability in the Midwest it appeared there was an interest in correcting the block/barrel spread during the spot session. Both products traded 6 times on the day but while the block held unchanged the barrels fell by 4 cents to $1.9450 putting barrels a penny below the blocks. It’s the first time that’s happened since July 1st. However we are still outside of the normal historical range of 3 to 5 cents.
The decline in the barrel price was taken as a sign of further weakness by the marketplace as futures traded to a settlement of 5 to 19 lower in 2014 months while mixed from -4 to +1 in 2015 contracts. Volume was good with near 1,000 contracts traded on the day and good activity was seen in the first half of 2015 contracts as well. Options activity was robust with 210 cheese puts trading vs. just 50 calls and in class III options the skew was highly toward the puts as well with 1,542 puts traded vs. 761 calls; this is a bearish indicator if it isn’t a one off which it has not been and we don’t’ expect it to be going forward. It seems that the direction of the marketplace is confirming itself to the downside for the coming weeks but given that the physical marketplace still is reported to be very close to a balance, it could be a choppy slide especially as buyers look to step in and buy cheese at levels not seen since late last year.
Cash cheese futures traded mostly lower as well on the day from -0.005 to -0.012 in 2014 as volume was just over 100 contracts. The market looks poised to move toward a carry in the forward curve with nearby months mostly falling more quickly than the deferreds. Whey futures were mixed on the day without a real sense of direction despite good volume being traded. Nov was up 0.025, Dec up 1.000 and Feb 2015 down 0.025 on the day. Half of the days trades interestingly took place in the July 2015 contract which settled unchanged. The market will be keeping a close eye on weekly NDPSR pricing later today.
Class IV, NFDM, and Butter
It was a relatively quiet day for the class IV market on Tuesday but the price movement was interesting as the nearby month of July spike by 23 cents while other contracts were steady to 12 lower on the day on 32 total trades. The NFDM market created much of the movement on class IV futures as the nearby contracts spiked higher, July was up 3.450 cents on the day, August up 2.050 cents on the day. We struggled to find a reason for the spike during the session but it did come on light volume so perhaps someone was just looking to exit contracts or perhaps someone had an instinctual read on what the weekly CWAP prices would show which were ultimately revealed at $1.8161 which was down 0.2% week over week and sales were up 22.4% to 14,233,424.
The butter market saw the spot session price move a penny lower on 6 trades but that failed to ignite much action in futures as just 30 trades took place. Prices were mostly lower with the exception of Nov. which closed up 0.775 on the day and other months were steady to 1.000 lower. The large backwardation in the forward curve will need to correct with futures rallying or spot moving lower and yesterday was a slight step in that direction, more is needed in the coming sessions.
The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Any reference to past performance is not indicative of future results. All references to futures/options trading are made solely on behalf of FCStone, LLC. All references to swap execution and bi-lateral swaps are made solely on behalf of INTL FCStone Markets, LLC. FCStone, LLC will clear swaps when applicable. Swaps are only available to eligible counterparties. All observations of economic, political and/or market conditions are not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. and its subsidiaries and should be construed as market commentary. All recommendations to buy or sell a specific derivative or forecasting statements regarding market activity and the pricing thereof should be construed as a solicitation in any jurisdiction in where such an offer or solicitation would be legal. Proper context and guidance including but not limited to the particular trading objectives, financial situations and the needs of the intended audience were taken into consideration when this recommendation was prepared. Contact your account representative for specific advice to meet your specific trading preferences or goals. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. and its subsidiaries. Sources of information believed to reliable were used in preparing such observations, and no guarantee or representation regarding the accuracy of those sources has been made. INTL FCStone Inc. and its subsidiaries are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material.
