Editor’s note: This market commentary is provided by the Dairy Division at FCStone/Downes-O'Neill in Chicago, Ill.

Another flare of European financial worries and a honing in on Italy’s total debt to GDP ratio, which is second only to Greece, shot the U.S. dollar skyward Monday (and again Tuesday). The U.S. dollar posted new highs early Monday morning, which may be a shot across the bow for the dollar bears… and commodity bulls. As far as yesterday was concerned, the dollar strength help pressure most commodities, with the exception of Class III.

Class III futures spent Sunday night through most of Monday trading the new week slightly higher. Monday’s volume registered at just over 900 contracts, as sideways futures trade continues. The two-sided spot cheese activity that started last week may not be finished, as 10 loads of block cheese traded Monday to trim the price by only 1.25 cents to a close of 2.0975 (barrels finished unchanged with no activity). Under spot weakness, Class III contracts flirted with pressing lower, but regained composure and 2011 contracts finished modestly higher yesterday. A large discount to the spot market and grueling summer heat that is forecast for certain dairy regions over the next six to 10 days underpinned prices.

Looking a little closer, the August contract is narrowing and range-bound in its price movements, while the more deferred 2011 contracts simply got to a point where producer selling dried up.  Commercial buy interest is moderate into the discounted Class III forward curve, and buyers seem more interested in the flatter 2012 contracts lately. Meanwhile, the futures market trend has yet to be clearly defined as of late, and we expect more of that choppy type trade until prices break out of the recent ranges lead by the August contract.

This morning, we look for Class III to open mixed.

An interesting session on Monday for the grain markets, as the sharply higher dollar and relatively good weather was poised to push things sharply lower. However, after trading to double-digit losses on corn in the overnight session, prices were relatively quiet and, in fact, bounced back fairly well ahead of the USDA report. 

After the close-crop condition ratings came in unchanged for both corn and soybeans, though it seemed trade was fearful of a slight decline while spring wheat ratings came in up 3% this week to 73% good to excellent. Those ratings were likely to weigh slightly when the overnight market opened, but the plummeting Euro and equities amidst a soaring U.S. dollar took center stage and crushed the grain complex. Bulls are a thinning and dying breed; at this point they need a major USDA revision in their favor to get any real traction upward beyond a dead-cat bounce.

We look for corn to open 12 to 15 cents lower and soybeans to open 6 to 9 lower.

Daily CME spot market prices:

Block cheese: $2.0975 (down 1.25 cent)

Barrel cheese: $2.1025 (unchanged)

Butter: $2.03 (unchanged)  

Grade A NFDM: $1.625 (unchanged)     

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