Nearby Class III and Cheese continued its ascent Monday with buyers becoming more aggressive as the speculative “shorts” in the market unwind some positions. Class III open interest fell 54 contracts overall yesterday driven by the February contract, which saw open interest decline by 199 contracts on 1,199 trades. You read that right. Of the 2,829 Class III contracts that traded yesterday, 42% traded in February alone. Cheese futures were also active with 699 contracts changing hands and open interest up by 40 contracts. But narrowing in the view, open interest declined in Jan-April contracts.
The butter market – prompted by the bullish Cold Storage report released last Wednesday - seems to have stirred dairy overall during the past few trading sessions. Sometimes markets don’t need a clear path – just enough of a news print to make people worry. Between the red hot butter rally seen late last week and anecdotal comments about lackluster milk production and better US cheese exports over the past month or so, Class III and Cheese futures traders have taken a shoot-first, ask-question-later approach so far this week. While there may be more upside for both Class III and Cheese – especially given the more aggressive spot market bidding trying to keep pace with futures – we won’t be surprised to trade both sides of unchanged today as air pockets exist after swift moves.
Interestingly, it was butter futures that traded mixed Monday despite continued gains in spot. Spot butter closed over $2.80 ($2.8025) for the first time in three months. Futures consolidated recent gains yesterday. The wave of buying last week (a) doesn’t continue indefinitely and (b) was met on Friday with excellent broad-based selling in the mid to high $2.70s. The butter futures market may resigned itself to more of this choppy trading that developed yesterday as it builds stamina to make another move. Within that view, however, moderate downdrafts on futures prices are possible especially if spot selling interest picks up north of $2.80.
Spot nonfat pushed higher for the 5th consecutive session as it has likely gotten some support from the strong rally in butter. Nonetheless, spot nonfat is approaching the highs seen in October at $1.24/lb. Fundamentally, as we mentioned, comments of lackluster milk production and a need for milk for the additional cheese capacity, could leave nonfat underpinned as we also aren’t in a heavy stock environment. Globally, powder prices continue to hold up on GDT. After mixed results last week, both WMP and SMP were up at the GDT Pulse auction today. WMP was up 1.1% to $3,298 while SMP was up 0.2% to $2,650. NZ WMP has been the cheapest source of dairy solids for more than 2 years which was a drag on the entire dairy complex. The fact that GDT WMP has generally been trending higher for 3 months is supportive for dairy prices in general. However, all indications are that Chinese import demand is still weak and the higher WMP price could dent demand in the rest of the world.
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