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

The summer doldrums subsided Tuesday as Class III futures traded 1,883 contracts,  more than double the volume of Monday’s quiet session.  Prices traded steady to lower to start the day and then sold off sharply ahead of – and during – the CME spot session as offers pushed the price of blocks down 1 cent intra-session. But buyers didn’t back down.  They absorbed four loads and bid the price of blocks back to unchanged sending a wave of buying into the August and September contracts. But positive territory was fleeting and futures succumbed to a burgeoning sell-side finishing .08 to .16 lower from August to December 2011.

The aggressiveness of the spot buyers yesterday was at the very least neutral news if not outright bullish, yet futures prices could not maintain any sort of a rally.  Is this a shot across the bow from the market bears?  The trading pattern appears to be changing here.  2011 Class III futures may in fact be telling us that a more material top is imminent because if futures can’t trade higher on bullish news, what can they trade higher on?  The market feels worn out from the recent rally at these levels.

The forward curve shows weaker prices into 2012 and that continues to attract what appears to be commercial buy interest while discouraging producer sales.  The January to December Class III pack traded three times at unchanged ($16.67) with another 9 bid there. For many producers, a $16.67 average just doesn’t pencil out with today’s feed prices.  But before we write it off as too low, let’s remember that it is just over $2 per hundredweight better than the 5-year average.  Call us to discuss strategy for next year.

Class IV futures were inactive Tuesday posting zero trades for the session.

Cheese futures traded 2 times and finished mostly flat with the exception of December, which was down 0.015.

The overnight session traded 47 contracts as prices rebounded from yesterday a bit. In 2011 prices were 2 to 12 higher, but in 2012, where only 2 contracts traded, prices were steady to 4 lower. 

We look for Class III to open steady to slightly higher.

Turn-around Tuesday helped erased the lion’s share of grain price losses from Monday. Corn traded quietly for most of the morning, but as the days temperatures heated up so too did the talk of drier crop conditions in the southern Corn Belt. A weaker U.S. dollar also underpinned the grain complex. New crop December corn finished up 12 ¼ to $6.8675 while November soybeans finished up 16 ¾ to $13.8875.

Agronomist Michael Cordonnier left his corn yield estimate at 156 bushels per acre in his weekly report.  He looks to a dry central Illinois and eastern Corn Belt, but wants to see how August weather comes in before making any further yield adjustments.  If forecasts begin to look cooler for August, we probably have factored in enough of a corn yield reduction.  If not, prices may need to add in some additional risk premium for a hotter August.  Either way, we are in the midst of a pre-harvest weather market. When making decisions to forward price feed needs longer-term, keep that in mind. And keep in mind that though we haven’t seen them for a few years, they’re called ‘harvest lows’ for a reason.

We look for corn to open 3 to 4 lower, soybeans to open 1 to 2 higher, meal to open steady and for wheat to open mixed.

Daily CME spot market prices:

Block cheese: $2.155 (unchanged)

Barrel cheese: $2.125 (unchanged)

Butter: $2.06 (up 2 cents)  

Grade A NFDM: $1.525 (unchanged)     

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.