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

Class III traded firm out of the gate Thursday morning on follow-through buying from Wednesday’s session. As for 2011 contracts, prices traded up to levels of technical resistance (as in the case of August re-testing all-time contract highs) and psychological resistance (as in the case of September trading through $19.00) before cooling during another weak day for spot blocks. Eight loads of block cheese came to the market and methodically lowered the price to $2.0025, though four different buyers were counted.  But with the spread between spot and futures still very wide, futures selling was in short supply post-spot, and the market essentially consolidated for the balance of the day.

When the dust settled, it was a decent July volume day of 1,132 contracts and prices were mostly steady to .10 higher. But with the gap between spot blocks and barrels sitting at an uncomfortable 10 cent-per-pound spread, yesterday was likely a respite before a more substantial market move. And although there was a good showing of buyers on the blocks, sellers are the clear aggressors and so we suspect that the barrel price may have only hours — not days or weeks — to sit idly by at $2.10.

Although the lion’s share of trading volume — over 900 contracts — occurred in the 2011 contracts, we continue to note commercial buy interest picking up steam into 2012.  One hundred and ninth-seven contracts traded between .05 lower and .10 higher in 2012 and that mid to high $1.60 cheese price level has garnered some earlier-than-expected buyer hedge attention. In the cheese futures, volume was also heaviest in 2012. This is to be expected, as the discount to current spot pricing creates an appearance of value for next year. Still, it is a “budget-able” number and it pans out for many who are seeking a percentage of longer-term coverage sooner rather than later.

Next Tuesday (July 19th), we will get another viewpoint of cheddar cheese pricing. For the first time, Fonterra’s Global Dairy Trade Auction will post cheddar pricing on their platform. While this may not have an immediate impact on U.S. dealings of physical product, it will shed more light on international pricing and, perhaps, aid price discovery/transparency for our U.S. and global markets. 

Corn futures — indeed the entire grain complex — consolidated today after a sharp rise in corn prices lifted all grain and bean boats this week. The market had clearly already dialed in strong export sales. Weekly corn exports remained strong with 66.1 million bushels reported sold for the week.  This comes in on the high side of trade estimates and reflects big Chinese buying also strong. Weekly soybean export sales were also stronger than normal, at 24.2 million bushels, about twice the 10-week average and right at the high-side trade guess.

Traders and analysts have been ratcheting up their figures for Chinese corn import potential from 1.5 to 5 million tons. COFCO Corporation of China sees Chinese soybean imports at 56.0-56.6 million tons for 2011/12, up around 9-10% from last season. The USDA estimated ‘11/12 Chinese soybean imports at 56.5 million tons in its July S&D Report.

More pressing today, however, is the weather. And while we expect the initial market impact of the heat dome expected to move about the Corn Belt is already priced in, such talk may continue to underpin prices here into the weekend. It looks like southern Minnesota and northern Iowa will get the only material rains through tonight before the heat wave begins. The next chance for cooler air and rainfall is now firmly a week away.

We look for corn to open firm and soybeans to open 1 to 3 higher.

Daily CME spot market prices:

Block cheese: $2.0025 (down 3.25 cents)

Barrel cheese: $2.1025 (unchanged)

Butter: $2.03 (unchanged)  

Grade A NFDM: $1.62 (down 0.5 cent)     

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