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

Class III futures closed out the week on a mixed note despite a very sharp jump in the spot markets. Settlements were mixed from +6 to -15 all the way through December 2012, and volume was extremely heavy with 2,642 trades. Buyers jumped in head first on spot cheese during Friday’s session, rapidly pushing the blocks above the $2 mark and right on up to $2.05 where we finally saw the first trade in the spot market since a load traded at 1.78 on May 25.

On the week, blocks gained 24 cents and barrels were up 14.25 cents. The July to December pack average gained 33 cents to settle at 18.72; however, in spite of the large gains futures are now trading at a discount to the spot market with July the highest contract at 20.00 not yet pricing in $2 cheese.

As was the case in March, the market doesn’t expect prices over the $2 mark to stick around for very long, and neither do we. Looking at futures that were carrying a premium, and are now at a discount, we continue to think this is a time for producers to be hedging. Even with high grain costs, the market is now providing an opportunity to lock in or protect a margin. Please call to discuss your specific situation, but with current price levels everyone should be exploring the market for strategies they are comfortable with.

It will be a very interesting start to the week as the market attempts to adjust to this sudden change in the relationship between the spot and futures markets. While we would not be at all surprised by some early week strength in both markets, our feeling is this rally should flame out in the very near future.

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

Grain prices ended the week mixed as Minneapolis wheat saw massive gains of 51 cents, while old-crop corn dropped 12.5 cents to settle at $7.54. Price seems to be directly tied to the fundamentals right now, as slow planting in North Dakota and Canada is sending Minneapolis wheat sky rocketing, while negative margins on ethanol and cattle are playing into the fall of corn prices.

With the planting progress report coming out later this afternoon, and the weather having been very favorable to planting, we’d expect a cautious trade today, but perhaps some weakness due to the expectation of rapid progress in the ECB. Thursday morning we get the USDA’s June S & D which should carry very few changes, but may play into the trade psyche as USDA has made changes to new crop yield in the past from May to June, but it’s very rare and old-crop demand has seemed to follow the pattern USDA had laid out, so we doubt any changes will be made there. We will include trade expectations later in the week. We will look for a sideways choppy affair for now as late plantings have trade on edge. And, it seems that though we’ve cut some demand, it may not be enough give the production issues not only here in the US but also abroad.

We look for corn to open 8 to 12 cents lower; soybeans 6 to 8 lower. .  

Daily CME spot market prices:

Block cheese: $2.05 (up 10 cents)

Barrel cheese: $1.96 (up 7.25 cents)

Butter: $2.1425 (down 2 cents)  

Grade A NFDM: $1.6425 (unchanged)

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Source:  FCStone/Downes-O'Neill