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

It wasn’t another quiet CME spot cheese market session, nor another lackluster volume day, in Class III that caught traders’ attention yesterday (although those were present), but rather Class IV options. 1,208 Class IV options traded Tuesday to post an all-time record volume and open interest. The bulk of the shocking volume came in the form of a July to December $18.00 put, $22.00 call option fence that traded 100 times per month. Class IV futures traded no contracts all day.

Ahhh, it’s good to see a market come alive like this and it’s a testament to the old adage in the dairy markets: size begets size. The volume of the trade is only overshadowed by the fact that 76 of those min/max trades took place on the Globex electronic platform overnight, the rest on the floor during the day. This is not your dad’s dairy market.

On a more somber note, Class III futures continue to lightly trade a tight range. An estimated 653 contracts exchanged hands skewing prices from +.11 to -.5 buy the closing bell. Market direction has been sideways as participants wrestle with, among other things, what feels like an anemic cheese situation and adequate milk supply, on one hand, and Class IV premiums and a firm dry whey trade on the other.
For the second day in a row, the spot cheese session was quiet with zero interest. This is a market in equilibrium or the eye of the storm or, more likely, a little bit of both. While some indicators point towards renewed Class III strength, we recommend the purchase of puts to set a floor for the second half of 2011.

Cheese futures were quietly weaker on offer mostly as only four contracts traded Tuesday.

Corn, soy, wheat were all up for the majority of Tuesday trading session, as both end-users and speculators looked to add some length and/or square away some positions ahead of this morning’s USDA Crop Production Report. 

Corn and bean export inspections continued to cause some concern for market bulls and grain farmers alike. Corn inspections of 27.8 million bushels were a 10-week low, and bean inspections hit a marketing-year worst at 6.0 million bushels. Corn inspections need to average around 38 million bushels from here on out to match the estimated USDA year-to-year decline, while beans need to rebound to nearly 10 million bushels through August to reach the current USDA year-to-year increase.

Daily CME spot market prices:

Block cheese $1.6475 (no change)

Barrel cheese $1.66 (no change)

Butter $2.04 (down 1 cent)

Grade A NFDM: $1.64 (no change)

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Source:  FCStone/Downes-O'Neill