Editor’s note: This market commentary is provided by Dave Kurzawski risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

Chinese President Hu Jintao begins a state visit to the United States today, his first in nearly five years. Commodity traders around the country - and world for the matter - will be very interested in keeping an ear to his comments in Washington today. According to the Dow Jones Newswires, “A hint of changes in Chinese demand forecasts, economic-growth plans or monetary policy could quickly seep into commodity markets.” If there are going to be any market shaking statements made, I suspect they will be said with an anti-inflation tilt regardless of whether it is otherwise just smoke and mirrors.

Class III futures maintained a firm trade yesterday as worries over tightening supplies continued. Spillover buying from late last week started the session and that was further supported by marginally stronger Fonterra Dairy Auction prices. The futures trade began to stammer somewhat after the Chicago Mercantile Exchange spot cheese price finished unchanged for the first time in 8 trading sessions. But it wasn’t long before a quiet trade in cheese was overshadowed by a continued push to the upside during the CME spot NFDM session. Both CME Grade A and Extra Grade NFDM have now cleared the prices highs of both 2010 and 2009.

So cheese is stable so far this week, but the dry markets (powder and dry whey) continue to find a higher bid for product. The question on everybody’s mind is will cheese continue its price advance here this week? Perhaps. Calling a top, even for the short-term, can be impossible. But, the odd development here is that while powder and dry whey keep their firm posture in the world of commodities, cheese — the cheapest of the proteins out there right now — is sluggish at best. There was some New Year pipeline refill that took place over the past two weeks, but that seems to be waning some now. This initial jolt to the upside may prove to be too much too soon. Look for a mixed opening on Class III, but a corrective move on prices seems overdue.

The USDA will release the December Milk Production Report at 2 p.m. Central Time today. We’re expecting U.S. production to come in up 2.6 percent, while 23-state production is expected at 3.1 percent. These numbers are likely already figured into futures prices. What is not is any substantial deviation from what we’ve seen the past few months. We will update you as those numbers arrive.

The grain complex continued to move higher overnight as we engage new price territory on almost a daily basis. Argentina’s corn and bean crops have been hurt by hot dry weather, but the worst of the weather seems to have, at least temporarily, passed. If their crop stabilizes, we will have seen the worst numbers a couple of weeks ago for South America. With President. Jintao in Washington D.C. this morning, we wait to see what, if anything, comes from those meetings today and how it might impact the overall grain picture for tomorrow. Look for the grain complex to open firm here this morning.


1/18 Class III Futures: Volume: 1,911 Open Interest (OI) Change: +178 Total OI: 33,479

1/18 Class III Options: Est. Put Volume: 977 Total OI: 25,799 Est. Call Volume: 1108 Total OI: 23,849

1/18 Spot Markets: Block Cheese $1.5250 (UNCH, 0 Trades); Barrel Cheese $1.4750 (UNCH, 1Trades)

Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.4675 (UP 3 1/2, 4 Trades), X $1.4400 (UP 4, 0 Trades)

1/18 Other Dairy Futures Volume: Butter: 77 Dry Whey: 39 NFDM: 21 Class IV: 44 Cheese: 79 International SMP: 0

1/18 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11            $13.51        UNCH        Vol: 172       OI Change:       DOWN 129

Feb 11          $15.12        UP 12          Vol: 287       OI Change:       DOWN 13

Mar 11          $15.23        UP 10         Vol: 500        OI Change:       UP 13

Apr 11          $15.60        UP 15         Vol: 236        OI Change:        UP 15

Jan-June 2011                    Avg: $15.19                     UP 0.09/cwt

July-Dec 2011                   Avg: $16.21                     UP $0.08/cwt

Jan-Dec 2011                    Avg: $15.70                     UP 0.09/cwt

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Commodity trading involves risks, and you should fully understand those risks before trading.

Source: FCStone/Downes-O'Neill