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

Class III prices traded light volume, failing to reach the 1k mark in volume yesterday, as just 850 trades occurred and prices were lower across the board from July 2011 all the way out to June 2012. After trading mixed early, prices declined following the spot cheese session which saw both blocks and barrels close unchanged. It appeared the damage could worsen when the butter market dropped 5.5 cents, but the buying there left sellers of Class III not feeling the need to get over-aggressive.

As was the case with the more surprising butter estimate from the USDA’s Cold Storage report, little reaction was seen to what we would call a bullish cheese estimate. Despite the slight decline in American cheese stocks, it is hard to believe this report will have a positive impact, as a stocks draw-down is just what we saw in March which proceeded a near $3.00 /cwt. decline from March into April.

We look for Class III to open soft, for spot to be steady to lower and for futures to close lower

 It was an incredibly active day in the butter markets, as participants seemed to be gearing up ahead of yesterday afternoon’s cold storage report and motivated further by the spot price decline. Futures were active from the beginning of the session, as sellers were the aggressors. On the day, 372 contracts traded and prices from July through November were down 3.500 to the limit 5.000 cents on a whopping 368 trades. December settled a penny lower, as well, with 4 trades rounding out a total volume of 372 contracts.

In spite of the weakness, and a 5.5-cent drop in the spot market on six trades, futures did close with bids in most cases sizeable bids resting at their closing prices. After what we termed as a bearish report yesterday afternoon, prices saw almost no reaction having done their work it seemed prior to the release. While the massive increase in stocks is still somewhat of a mystery, this market does still appear to be very two-sided, as buyers are more than willing to purchase futures on price dips. Our inclination following the report is to say that a test of the $2.00 mark appears likely, but with the aggression of buyers in not only futures but the spot market, as well, it is looking like it will be difficult for futures to fall that far unless some weakness is seen overseas.

We look for butter futures to open mixed.

And, we look for corn to open 5 to 8 cents lower; soybeans to open 2 to 4 lower.

Daily CME spot market prices:

Block cheese: $2.13 (unchanged)

Barrel cheese: $2.0675 (unchanged)

Butter: $2.085 (down 5.5 cents)  

Grade A NFDM: $1.6375 (down 0.25 cent)        

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Source:  FCStone/Downes-O'Neill