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

Sometimes the Class III trade makes the late discussions of Sarkozy, Merkel and Papandreou look easy. Volume and open interest spiked Thursday along with prices from November through January as the trade seemed to collectively wake up to the firming spot cheese market this week. 

The somewhat delayed reaction started early Thursday morning as December led the way higher trading. Nearby contracts posted 10 to 30 cent gains into the spot session mid-morning, which again found ample buy interest and more strength. Blocks closed up 4.50 cents to $1.83 while barrels tacked on another 4-cent gain to finish at $1.87, which catapulted November through December futures with December again leading the way and trading as much as 75 higher (limit up) briefly before consolidating to a close of 63 higher. 

When the dust settled not only did December lead the price move, but nearly half of Thursday’s 2,127 trading volume was reserved for the Christmas contract. 

We reported that barrels were tight and they are. But we also reported that we thought the futures response over the past few days was weak in nature and foreboding for the spot prices. Today we were proven wrong with this large — albeit narrow in timeframe — price spike. Typically markets have a “blow-off” trade to mark the end of a period of firming prices.  Will we look back at Thursday as an emotionally driven blow off top for 2011 contracts?  It is too early to say for sure, but producers who have milk left to sell for the balance of this year ought to use this sharp rally to market any remaining milk for the balance of the year.

We expect October Class III to be announced at $18.03 this morning and Class IV to be announced at $18.41

Cheese futures followed the bullish tone of the day trading 237 contracts between unchanged at .038 higher (December closed up .056 cents on bids only).

The Class IV market took a trading reprieve Thursday posting only two contracts trading and finishing unchanged across the board. It is safe to say the Class III/cheese markets garnered the most attention and we suspect that will be the case again to start this morning.

Overnight trading volume was 31 contracts by just after 10 p.m. with prices mostly higher March was the lone lower month down 12 while other contracts were steady to 12 higher led by Nov. By this morning 76 contracts have traded and while prices remain mostly higher gains have moderated with November up 5 the biggest mover.

We look for milk to open slightly higher.

Butter futures caught a break from the recent onslaught of sell pressure Thursday trading just 29 contracts and finishing mostly unchanged.  Sell interest was piqued during the cash market session, however, as the spot price appears to be playing catch up with the recent futures price weakness.  Spot butter dropped 1.75 to finish at $1.86 after three trades occurred all at unchanged.

Many industry folks are asking us what the future holds for butter.  While there is much to be unsure about in the world these days, the preponderance of current information points to a weaker butter market on the horizon. Production is robust, demand is fickle to slow, and once the holiday sales are behind us; few markets seem so well poised for more weakness. That said, the futures market has endured much selling of late and we expect some level of short term support to fall in soon, if not at current levels.  In other words, for now we expect that futures downside is limited in the short-term.

We look for butter prices to open mixed.

Corn futures continued to chop within a three-week pricing range Thursday.  The market firmed slightly on a weaker U.S. dollar and stronger-than-expected weekly export sales.  Soybeans, which saw weaker than expected export sales, may have led the rally on thoughts of increased demand as South America dries up their sales.  Brazil’s Foreign Trade Ministry reported earlier this week that October soybean exports at 1.41 million tons, down from 2.80 million tons in September but above 1.01 million tons last October. The South American soybean crop has a bigger window for exports this year but should soon run out.

Corn sales were 24.5 million bushels, up from 13.2 million bushels last week. Traders had 23.6 million bushels for the high side of the guess. Weekly soybean export sales were lukewarm at 7.7 million bushels on the week, while wheat export sales came in at 11.8 million bushels, lower than expectations.

Overnight grain prices were very quiet with mixed prices, corn was down 1 to 3 cents beans 1 lower to 1 higher and wheat steady to 3 lower. By this morning little has changed with no clear direction to the grains or the outside markets.  

We look for corn to open mixed from -2 to +2, beans to open mixed from -1 to +3, meal to open steady to 1 higher, and wheat to open 1 to 3 higher.

Daily CME spot market prices:

Block cheese $1.8375 (up 4 ½ cents)

Barrel cheese $1.860 (up 4 cents)

Butter:  $1.860 (down 1 ¾ cents)  

Grade A NFDM: $1.430 (unchanged)

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