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

Class III futures continued to steam ahead to the upside yesterday on heavy volume. More than 2,400 contracts traded hands as follow-through buying from Tuesday’s day session spilled overnight and continued well into the trade Wednesday. Concerns over availability of fresh cheese helped push the panic button for buyers clear into 2012. Solid bid interest again during the spot session left the price of block cheese at $1.9050, with barrel cheese in tow at $1.8725.  The July contract printed a high of $20.25 amid the buying frenzy, but finished slightly lower at $20.05 — the first $20 price handle in nearly three years. 

Many have asked if this is a hyper-inflation scenario playing out for Class III or if this week’s slight panic surrounding the supply of available fresh product is overdone. No one knows for certain, but it appears as though that the nearby months are in a classic spike trade that comes during a panic. The issue with these price spikes is they can end up fading quickly, giving fodder to the “buy the rumor, sell the fact” mentality common in trading.  It’s too early to tell if that will be the way this plays out here, but producers ought to be continually looking at their hedging plan now.

The April USDA Dairy Products Report was released yesterday afternoon and looks moderately bullish for cheese, but more neutral to bearish for other product categories. Milk continues to make its way into the class IV products at a greater rate than our estimates, while cheese production was slightly behind our expectations. Manufacturer’s stocks increased vs. March for each commodity. Butter production up 19.4% vs. year ago levels was the highlight and surprise if there was one on the report. 

Cash cheese trading once again saw gains across the board, but only one trade occurred on the day. Prices were steady to +0.033 with the lone trade coming in November which settled up 0.019.

Grains recovered from Tuesday’s sell-off yesterday, but it was a good two-sided trade all day.  The fundamentals are of tight supplies, record demand, and difficulty getting crops planted in many areas of the Northern Hemisphere have kept prices high. But the market appears to have absorbed the lion’s share of the bullish news at this time. That won’t prevent more of a price spike should trader’s get another bout of bad news, but for now the market has tried and failed to make new highs and appears to be losing upside momentum.

Soybeans have been trading mostly sideways. With the problems surrounding U.S. corn-planting this spring, we will likely end up with more beans than farmers intended in March. And Chinese demand has been slow in recent weeks. Still, there is a lot of growing season left and nobody expects China’s purchases to be smaller next year. But, for now, soybean prices may push lower.

We look for corn to open steady to 2 cents higher; soybeans to open 3 to 6 higher. 

Daily CME spot market prices:

Block cheese: $1.905 (up 3.5 cents)

Barrel cheese: $1.8725 (up 0.25 cent)

Butter: $2.1625 (unchanged)  

Grade A NFDM: $1.64 (unchanged)

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Source:  FCStone/Downes-O'Neill