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

Class III futures started on a mostly firm note Thursday on light follow-through technical buying and expectations of more CME cheese price strength, but quickly lost footing after a cheese made its way back to the CME during the spot session. Blocks finished the session unchanged, but barrels lost two cents and traders lost their appetite for additional risk premium in nearby Class III futures. Volume picked up and prices declined, as May to October futures finished 0.01 to 0.21 lower. 

Commercial buy paper has underpinned the market well into 2012 at this time, but it was largely speculators who looked to lightened their long positions coupled with some inventory hedging to provide a formidable headwind Thursday as 1,173 contracts traded hands. For the first time all week, the Class III market cleared 1,000 contracts. Producer selling has been somewhat light lately, but we expect that selling interest may increase here to end the week as feed prices have taken a turn for the weaker.

While there is cheese available to come to the exchange, international cheddar prices remain robust, up over 2 cents to $2.0185 as reported by the USDA Thursday. So long as international cheese prices remain strong, there should be support in the mid-$1.50 to low $1.60 U.S. cheese market. However, buy interest does not appear to have legs at prices even slightly higher than that right now.

We look for a weak open, a steady spot market and a slightly higher close to end a weak with choppiness. We suspect it might be a few weeks of price weakness ahead though.

In the grains, the easy-money policy action detailed by the Fed on Wednesday was not enough to prevent a widespread sell-off in commodities in general and corn in particular on Thursday. It didn’t matter that the U.S. dollar pushed to new lows, because it was improving weather and end-of-the-month fund selling that ruled the grain trade sharply lower. 

Welcome to a full-blown weather market.

To add bearish insult to injury, export sales were weak for both corn and beans. Net corn sales of 349,000 tons were down 43 percent from the previous week. Net soybean sales of 143,500 tons were down 59 percent from the previous week.  

Weather will be a key issue for the next several months, and that will mean more volatility.  While accumulating feed on price breaks is recommended, so too is the ownership of put options to provide protection for that purchased feed or fixed price. While stocks to use ratios are still tight, and while there may be upside risk to grain and bean prices this year, many times “things” looked cheap on the way to even cheaper levels. Protect the downside.

We look for corn to open 1 to 3 cents higher.

Spot markets:

Daily CME spot market prices:

Block Cheese $1.6050 (no change)

Barrel Cheese $1.59 (down 2 cents)

Butter $2.05 (up 3.5 cents)

Grade A NFDM: $1.625 (up 1.25 cents)

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Source:  FCStone/Downes-O'Neill