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

Class III finished on a weaker note yesterday on improved volume from Tuesday’s anemic session with over 1,280 contracts trading hands. While the day started off on a high note with prices rallying in pre-spot morning trade, the declining block and barrels prices in the spot session quickly sent futures into negative territory. The spot session saw six blocks trade with prices settling down 1.25 cents to $2.11, leaving two offers uncovered. Meanwhile, barrels also dipped ¼ cent to $2.10 on two trades with no bids or offers left. This was the first barrel price decline since June 17.  

Many in the market had been suggesting that the declines in the blocks were due, and when they would come it would be fast and vicious. It hasn’t been. This is the third straight day of declining prices without a massive spot sell-off and that may speak to less of better-than-expected support here in Chicago. It’s still too early to say for sure, as there is often a weakening of a dam wall before a collapse.

Right now, it seems that the dairy world is split between two camps. The bulls are saying that while blocks are falling, and may very well continue falling, the market has priced in cheese falling to the low 1.80’s. Are blocks going to tumble 30 cents? And if they do, it’s priced in. In other words, we have a cheese price correction already dialed into futures.

The other camp is calling an end to the Class III rally for the balance of the year due, in part, to increasing demand deterioration and adequate milk supplies. Which camp are we in? We are of the opinion that the futures are not wrong and that the risk is to the downside. The real question is how much and for how long?    

We look for Class III to open mixed this morning.

Old-crop corn got clobbered Wednesday with July losing 31.75 cents to settle at 648.75, while December only lost 4 cents. Beans fared better with July, losing only 1.25 cents to settle at 1331, while November finished ½ cent higher to 1318.50. The Chinese interest rate increases, rally in the dollar and a continuation of the near-perfect weather across much of the grain belt all helped to push grains lower.

The big factor here is China. Anything that may slow down Chinese consumption is going to cause concern in the grain markets, for Chinese purchases have been priced in. If the rubber ever hits the road on the rate cuts (which is a matter of debate because they peg the Yuan to the U.S. dollar) causing a slowdown in China’s economy (growing at almost 10%), we can expect further, material declines in the grain prices across the board. There’s a lot of moving parts here, but if I know one thing: a “soft-landing” is rarely in cards.

We look for corn to open slightly mixed and for beans to open 1 to 3 higher.

Daily CME spot market prices:

Block cheese: $2.11 (down 1.25 cent)

Barrel cheese: $2.10 (down 0.25 cent)

Butter: $2.04 (unchanged)  

Grade A NFDM: $1.625 (unchanged)     

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