Class III futures traded mostly lower giving up part of Monday’s gains during a quiet, low volume trading session Tuesday. With the substantial price premiums built into the forward Class III curve, even a firm CME spot cheese session — 11 bids in blocks remained — and firming dry whey prices weren’t enough to inspire further futures gains. Slightly over-bought conditions and quiet outside news made for more of a consolidation trade, which can be expected to extend into early trade here today.

Today the premiums in Class III are justified by high Class IV prices stealing marginal milk, high feed prices, a more typical seasonal pricing structure; expectations of commodity continued commodity inflation and an end-user buy community seeking price protection for all of those reasons. To top off today’s market-sentiment-sundae is the unknown potential of milk-debilitating summer weather. 

The key here is to recognize that as of today, the lion’s share of the ‘unknowns’ and ‘expectations’ and ‘pricing structures’  appear baked into futures prices already.  As a result, 2011 Class III prices look somewhat over-bought and vulnerable to a lower trade. Should other dairy markets extend their gains or should fresh news inspire more nervousness, prices can climb. Absent of these things, it is reasonable to expect a weaker path of least resistance today.

The milk production picture midweek remains snug in certain areas (like Idaho), but generally sufficient in many regions of the country. Processors tell us that it is the “extra” milk normally sloshing around about now that is hard to come by, but that by and large they have enough milk to meet their needs.

Class IV prices, on the other hand, remain strong in 2011 and are playing catch-up in 2012 despite a mixed review on the gDt results.  July 2011 to December 2012 gained between 0.05 and 0.53 Tuesday, but the priced moved mostly on bid positioning.  The trading activity was reserved for the nearby contracts; 95 of the 106 contracts that traded were in June, July and August. 

Cash settled cheese traded a total of 14 times on Tuesday with prices mostly steady.

Overnight class III trading saw 58 contracts traded, with unusually strong volume in deferred months; 298 in Nov (-5) and 21 in Dec (unch). Prices were 1 to 9 lower for the sector.

We expect Class III to open mixed to weak.

Corn continued selling off today while beans got hammered. Corn finished 4.75-11.75 cents lower in the old crop due to a broad commodity sell-off, and particularly the drop in crude where prices were down $2.68while new crop was up a penny as the risk remains to the up side due to weather concerns since we’re well behind on our planting. That being said, modern technology can accomplish things that were unimaginable just a few short years ago.

Soybeans got pummeled, losing 23.25-31 cents in the old crop while new crop was “only” down 19.50 cents.  The news out of South America is positive and it seems like their harvest will be fairly strong. The wet soggy conditions that are delaying corn planting are continued to weigh on beans as farmers may switch to beans if the delay in planting is extended.

This week the Brazilian trade ministry data showed April soybean exports at 5.09 million tons, up from 2.73 million tons in March and 4.91 million tons last April. Corn exports of 120,000 tons were down from 393,000 tons in March and 205,000 tons last April.

We look for corn to open 1 to 4 lower, beans to open 4 to 7 lower, meal to open 1 to 2 lower and for wheat to open 6 to 9 lower

Daily CME spot market prices:

Block Cheese $1.6350 (UP 1¼ cents)

Barrel Cheese $1.6175 (UP ¼ cent)

Butter $2.0750 (UP 1¼ cents)

Grade A NFDM: $1.645 (no change)

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Source:  FCStone/Downes-O'Neill