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

Class III futures kicked off the month of May on a firm note as prices finished Monday between .05 and .16 higher through October of 2012.  Just over 800 contracts traded hands as buyers plucked away at light offers largely resting above the market. Though two loads of barrel cheese traded, it was a slightly higher CME spot cheese market that helped ease Class III selling pressure on Monday.

Commercial buyers remain interested layering on coverage at current futures price levels, while the primary sell-side is not interested in putting up much of a fight. The irony of the Class III market is that from what we gather, both domestic and export demand remains very quiet for cheese right now. If the psychology changes because of an uptick in demand, we could see buyers push spot prices sharply higher rather quickly. But the impetus to buy spot cheese is largely driven by a pipeline fill of that which is on the “sale rack” right now. So, expect more buy interest at current levels until the warehouses are full, but as long as sellers have excess fresh product, we should not move much higher anytime soon.

With feed and energy prices at levels that allow for meager dairy farm profits — and with continued strong Class IV prices — the premium on Class III is not enough to entice producers to market their milk through the balance of 2011 and into 2012. As such, the path of least resistance has been to the upside.

The Dairy Products Production report, released by the USDA on Monday afternoon, looks neutral to slightly bullish versus our pre-report expectations. Milk moved into butter/powder production in March with cheese production closely in tow. While we don’t expect to see any real knee-jerk trading reaction to this report, it serves to show us that more milk appears to be going into storable dairy products.

Cash-settled cheese traded a total of 32 times on Monday, with prices steady to 0.014 higher in sympathy with stronger spot prices and the stronger Class III market.

We expect Class III to open modestly firm.

Both the grain and soybean markets gave back a chunk of Friday’s gains yesterday as the pre-weekend risk premium trade faltered on little fresh news and a speculative community who may have wanted to take some of their money off the table after the U.S.-led killing of Osama bin Laden on May 1. 

There is little argument that weather has stunted planting progress to date. The argument comes into play when we talk about how much of that news has been priced in already. Our guess is that a delay of 1 ½ to 2 weeks is already well priced into the corn market, and prices fell today on a lack of fresh bad-weather news.

The USDA crop progress figures showed that only 13 % of the U.S. corn crop has been planted as of May 1. This is 27 % below the five-year average and a whopping 53 % below year-ago levels.

Overnight prices saw a snap reaction to the planting progress, with corn prices for new crop quickly jumping to double-digit gains, while soybean prices dropped double-digits quickly as fear of acres moving back into beans due to slow planting weighed on prices.

We look for corn to open 5 to 7 lower, beans to open 10 to 14 cents lower and meal to open 2 to 3 lower.

Daily CME spot market prices:

Block Cheese $1.6225 (up 1 cent)

Barrel Cheese $1.6175 (up 1.5 cents)

Butter $2.075 (no change)

Grade A NFDM: $1.645 (no change)

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Source:  FCStone/Downes-O'Neill