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

Class III milk and cheese have failed to rally in the past week, but have also held up well while surrounded by outside markets that collapsed — grains, metals, energies, etc. Chart after chart on milk and cheese show clear consolidation following what was a large price increase. But sellers have not yet shown any panic. Cheese sellers must be strong in their conviction that prices will surge in the second half.

We remind dairy producers that the best time to buy option protection is when you feel confident you won’t need it: (A) it’s usually cheaper then and (B) the market often has a way of showing those thoughts of confidence wrong. We anticipate 2012 buy side hedges to ramp up as soon as August, but get into full swing by October.  

The July-Dec Class III pack lost just one cent on the week to close at $17.64. The blocks gained 3.5 cents to close at $1.6475 last Friday. The barrels gained 5.75 cents on the week to close at $1.66. Given the failure of futures to rally along with Class III, we gather that traders simply aren’t buying into (literally or figuratively) the spot price move as sustainable.

Cash-settled cheese futures traded just one time last Friday and were all unchanged across the board. Volumes have come and gone in spikes and prices have continued to move in tandem with Class III for the most part.

In the grains, it is an erratic market, a market on egg shells. It is a weather market and we entered it with new crop (Dec 11) corn at a record price for this time of year. That, coupled with extreme commodity price inflation across sectors, has left “money” risk capital skittish and on guard. Risk goes off easier than it comes on. We witnessed further evidence of that last Friday as corn prices fell 15 to 22 cents on whispers of potentially better weather and plantings prospects. Be ready for more of this volatility to come and realize that not much has yet changed fundamentally.

We will have to see this afternoon’s planting progress report to really see what got done in the fields, but we suspect the planting pace picked up. Today is a bounce. Watch out for the rest of the week, it could be tumultuous.

We look for corn to open 4 to 6 cents higher and beans to open 6 to 8 higher.

Daily CME spot market prices:

Block cheese $1.6475 (down 0.25 cent)

Barrel cheese $1.66 (up 0.75 cent)

Butter $2.095 (no change)

Grade A NFDM: $1.64 (no change)

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Source:  FCStone/Downes-O'Neill