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

Still at a discount, Class III futures kicked off the last week of June on a stronger note as futures edged higher on 1,125 contracts. Follow-through buying from Friday, along with a reluctant push to narrow the margin between spot and futures, were the primary fundamental reasons for Monday’s advance in the nearby months. There is no question the Class III market remains on the defensive here, as trader expectations are for an imminent spot price decline, but futures acquiesce nonetheless in the face of recent spot market stability.

Milk production appears to be adequate nationally, though the Midwest continues to deal with some level of milk tightness this week. Discounts on milk that may be expected this time of year are not occurring in the Midwest. The question then remains: Will the slightly tight milk production situation offset the demand destruction that can happen when we’re pricing $2/lb cheese?  So far it may have, but we continue to hear that cheese sales are slowing and discounted product is available.

The cheese futures traded 32 contracts between .008 lower and .023 higher yesterday.  Interesting to note that there continues to be good volume in the February 2012 contract, which has traded 24 contracts since Friday. We suspect there is more interest to come here in Q1 as commercial hedgers are increasingly looking further out for sub-$1.70 coverage.

We look for Class III to open mixed.

Corn spent Monday trading lower as traders grapple with friendly weather forecasts and an uneasy feeling about adding risk when considering economies around the world. Greece remains at the forefront. But the proof of speculative interests wanting out of the grains is in the CFTC pudding.

Friday’s CFTC Commitments of Traders Report showed massive spec fund liquidation during the week ending June 21. Managed commodity funds reduced their net long option and futures positions in grains and oilseeds by 117,948 contracts. 

Thursday’s USDA Crop Report may just give traders a reason to buy grains again, but it is too soon and the real risk is that the USDA cuts their demand forecasts. We do expect the market to stage a covering rally going into Thursday morning, but once we clear that report and the 4th of July weekend, direction ought to be clearer. Until then, the zigs and zags of this market may be fierce. 

We look for corn to open 4 to 7 cents higher; soybeans to open 5 to 8 higher.

Daily CME spot market prices:

Block cheese: $2.13 (unchanged)

Barrel cheese: $2.0675 (unchanged)

Butter: $2.02 (down 4 cents)  

Grade A NFDM: $1.625 (unchanged)        

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Source:  FCStone/Downes-O'Neill