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

Another thousand-plus trading session and this time encouraged by a strong sport session, prices once again continued their rally. Monday we saw the nervousness of buyers, selling at the concern cheese didn’t rally enough.  Yesterday we saw their conviction.

Once again prices rallied on strong volume and a significant increase in open interest. Market participants are doubtful of the fundamentals behind (or rather lacking) in the move up, but that leaves us feeling cautiously reminiscent of late December 2010-February 2011.  The level of strength and conviction is not the same but the feeling is very similar. For now we have to see if the cheese bid to runs out of steam here in the mid-$1.70’s to $1.80 than $2 per pound this time around.

Class IV prices gained as much as 45 cents in 2011 alongside strong volume; 2012 was mixed on no trades but strong bids and offers. Even the biggest butter bears are reluctant to sell and with spot powder prices firming, you can’t blame Class IV buyers for feeling antsy.

The overnight Class III session traded a strong 92 times alongside mixed price action with prices moving only a few cents up and down.

We look for Class III to open mixed.

Amongst very strong butter futures volume (182), we saw yet another day of limit up prices but again the CME will not increase the daily limits since front month futures were not limit up. Spot gained another nickel and even the most bearish butter people we know out there are reticent to sell; they are just sitting out. Buyers are panicked as they think it may be months until we “might” see imports come in to quell this market at all.

We look for butter futures to open higher, for spot to be steady to higher.

Amidst talk of removing ethanol mandates by Presidential candidate Pawlenty, changing weather report and a stronger U.S. dollar overall recently, the corn market plunged yesterday. But most of the price damage was done to old crop as the old/new crop spread took in 12 cents. Overnight things bounced back a bit and despite the dollar recent support vs. the Euro, don’t look for the grain markets to simply fade back below $7 without any difficulty.

We look for corn to open 3 to 5 higher for old crop and new crop, beans to open 9 to 11 higher, meal to open 0.5 to 1 higher and for wheat to open 6 to 10 higher

Daily CME spot market prices:

Block cheese: $1.7400 (Up 2 3/4)

Barrel cheese: $1.7400 (Up 2 3/4)

Butter: $2.1225 (Up 5)  

Grade A NFDM: $1.6250 (Up 1/2)

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Source:  FCStone/Downes-O'Neill