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

Class III prices firmed modestly during Tuesday’s session as prices reluctantly reconcile with continued stability in the CME spot cheese markets. July was the lead month, closing up 21 cents higher to 19.98, which is approximately 1.40/cwt below current spot valuations. Producer selling is light, commercial buyers appear to support the market at current levels, and there seems to be a very mixed sentiment as to the direction of spot from these levels.

While CME spot prices could eventually tug Class III futures higher, we don’t think the futures market is wrong for being discounted. With little fresh news to go on this morning, and what appears to be quieter demand activity lately as compared with that in the later part of May, we expect that cheese will shake loose at these levels and spot prices will fall in the near term.  Meanwhile, milk production has been improving slightly.

In a season of rampant tornados, floods and crop-killing droughts across the country, one area that is not getting a lot of air time is the good weather of much of the U.S. milk-producing regions. From the San Joaquin valley north to Washington and clear east to New York, weather is ideal for milk production right now. We will get the USDA milk production figures for May on Friday and expect a more humble increase of 1.4 for the U.S. (1.7 percent increase for the 23-states). While it appears we need to do at least that to keep up with demand, the weather in June should sponsor solid milk production numbers well into July.

Cash cheese futures were silent yesterday as bids only pushed settlement prices up .005 to .015 higher.

By this morning, Class III had traded 49 times, and while June was 2 lower all others were up and by as much as 8 cents. $20.00 appears poised to be broken through and held above again. The spread differential between Class III and IV has been brought back within a more reasonable limit, but is still large by every standard of measure.

We look for Class III to open slightly higher.

Corn continued Monday’s sell-off in aggressive fashion yesterday as weather forecasts look ideal for growth over the next 6 to 10 days.  At one point, corn traded down 30 cents or limit before recovering slightly to finish 27 cents lower in July and 19 ½ cents lower in December. Soybeans and soybean meal, too, closed lower in sympathy with corns decline.

Traders looked at the weather and the USDA report that corn planting is 99% completed in their Crop Progress Report out Monday afternoon and wanted to trim some market length.   Nationwide, the corn emergence was pegged at 91%, compared to 96% normally at this date. The corn crop was rated at 69% good to excellent, up 2 points from last week.

Part of the reason for lower commodity markets can also be blamed on China’s central bank which announced another rate hike yesterday (the 6th one this year). The move, which is just another step in their campaign to reduce inflation, increases the required reserve ratio for the country’s biggest banks to a record 21.5 percent.

By this morning, corn prices are under a bit of pressure from a firming dollar and softening crude oil prices. We look for corn to open 2 to 3 cents lower and soybeans to open 1 to 3 higher

Daily CME spot market prices:

Block cheese: $2.11 (unchanged)

Barrel cheese: $2.0725 (up 0.25 cent)

Butter: $2.14 (unchanged)  

Grade A NFDM: $1.655 (up 0.50 cent)        

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Source:  FCStone/Downes-O'Neill