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

Class III posted a solid volume of 1,413 contracts during bursts of trading activity in what otherwise seemed like a quiet day for the dairy markets on Thursday. After starting out 4 to 11 cents lower, nearby futures regained ground and then rallied to as much as 19 higher (November) as another round firming spot cheese prices pushed blocks up 1.50 and barrels up 4.50 cents, respectively. Considering the falling international cheese prices, we may be looking at the first time all year when domestic cheese demand alone is at the helm. 

Maybe that’s why Thursday’s rally left something to be desired by market bulls. The three-day rally on futures is showing signs of slowing as we approach heavy technical resistance of the 200-day moving average on November, the lead month. Further out in 2012, prices haven’t participated in this week’s recovery rally, which is surprising considering the strength in dry whey futures Thursday. Regardless, it’s been a quiet sideways trade on so far as deferred prices have mostly consolidated over the past few days. We expect that to change here in the coming days as the stabilization in price ought to give way to another round of commercial physical and financial buying, giving a boost to at least the first half of 2012.

Cheese futures traded 130 contracts in mixed fashion yesterday finishing between .008 higher and .012 lower.  The bulk of the trading activity, or 97 of the 130 contracts, took place in the December through March time period. Like Class III, cheese is maintaining a slightly discounted pricing skew into 2012 and we expect that to continue, though a bounce on futures may be imminent. Since last Thursday, the block price is up 2 cents to $1.7400. There have been eight trades. The barrel price was up 6 cents at $1.7300 with 21 trades. The spread is 1 cent, outside the historical range of 3 to 5 cents.

Class IV traded steady to 30 cents lower Thursday largely ignoring the steady to firm trade for both butter and NFDM futures. Granted, Class IV can afford to give up some ground and be priced in line with butter and powder as this market has run a little hot over the past few weeks posting a slightly premium to the butter/powder spread. We look for more of a mixed trade for Class IV today. 

Overnight Class III was mixed from plus four to minus four on a light 15 trades.  We look for milk to open mixed.  

While butter is generally weaker and bearish in posture, the one element missing is signs of active, nervous sellers.  We expect that there is a good deal of product that can come to the exchange, but the impetus to do so has not been a factor this week. Spot butter rose 1.25 cents Thursday and we anticipate more stability in that market to finish the week. Butter futures, on the other hand, had a lackluster response to a higher spot market finishing unchanged on 31 trades in all but November, which traded up 2 cents to finish at a discounted $1.74. The CME Grade AA butter was up 1.00 cent from last Thursday at $1.7700, with 1 load traded. USDA weekly stocks were down 1.3 percent from last week and are 26.2 percent below last year.

We look for butter prices to open steady. 

The rally of late in the grain complex came to an abrupt halt yesterday while commodities in general have been in bear bounce mode this week. Corn traded 13 cents better along with beans and wheat, but midday selling slowed the rally dropping prices back towards unchanged. The U.S. dollar and grains have traded independently of each other almost all week, as the rally in grains is largely representative of a technically oversold conditions mixing with heavy end-user buying at sub-$6 per bushel prices.  Also in the mix were corporate earnings that came and went without much to disappoint. And weekly jobless claims numbers out yesterday were 9,000 lower than expectations.  As the equities markets have rallied, so has corn and beans. Overnight more selling pressure came into play for the grains, the equities and commodities in general.  

Weekly corn export sales numbers confirm China has been in the market. For the week, total corn export sales were 50.8 million bushels. The market was expecting 29 to 39 million bushels.  Weekly soybean export sales were in line with trade guesses at 27.3 million bushels versus 21.8 million bushel average. Weekly wheat export sales were humdrum at 15.8 million bushels, right at the weekly average and within the trade guess range of 13-18 million bushels.

We look for corn to open 7 to 10 lower, beans to open 4 to 6 lower, meal to open 0.5 to 1 lower and for wheat to open 5 to 7 lower. 

Daily CME spot market prices:

Block cheese: $1.7400 (up 1 ½ cents)

Barrel cheese $1.7300 (UP 4 ½ cents)

Butter: $1.7700 (UP 1 ¼ cents)  

Grade A NFDM: $1.490 (unchanged)

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