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

With the newly arrived sharp discount between the spot and futures markets, Class III contracts opened slightly higher yesterday and traded steady to 25 higher into the spot session. When both blocks and barrels moved up on bids alone futures seemingly had little choice but to follow along. The rally once again suffered from a softer butter market but futures were still able to post gains of 10 to 45 cents through the 2011 months as volume was once again strong with 1,706 contracts traded.

There is little news to report outside of the spot market as traders continue to attempt to digest the cheese issues with little resolve. While our bias remains to the downside in the medium term it seems that spot prices are still well-supported as of yesterday.

Cash cheese futures recovered along with the Class III market yesterday but volume was very light with just three trades occurring all in the October contract. Settlements showed prices up 0.001 to 0.035 cents from July through December.

Class IV futures were relatively quiet once again yesterday as 5 trades occurred all in August which settled down 10 cents. Other months were mostly unchanged with September and August closing down a penny on offers.

Overnight class III futures were steady to 7 higher on 25 trades. All of the trading volume was in the June through August contracts. By this morning only two additional trades have been seen and prices are steady to 8 higher.  

We look for Class III to open steady to higher, for spot to be steady and for class III to close mixed.

In the grain market, a wild rally seen in futures during yesterday’s trading session led by old crop corn which continues to be tight and supported by large buying on breaks. July corn closed up 27.5 cents at 764, Dec corn was up 17.25 at 693.75, beans were up 5 to 7 cents, meal up 2 to 5 dollars per ton led by nearby strength on plant closings with the Missouri river flooding. Wheat finished the day stronger pulled higher by the strength in corn finishing up 10 to 15 cents.

News was fairly light, although a story by Reuters noted that “Flooding along the Missouri River and in other key growing areas of the United States will lower the corn and soybean acreage that farmers harvest this fall, a widely-followed crop forecaster said. ‘That river bottom is planted full of corn and soybeans from South Dakota all the way to St. Louis,’ Michael Cordonnier, president of Soybean and Corn Advisor Inc., said on Wednesday. ‘The abandonment is going to be higher this year.’ Harvested corn acreage would fall to 82.5 million acres, Cordonnier said, a drop of 500,000 from his previous estimate and well below the latest U.S. Agriculture Department forecast of 85.1 million. For soybeans, Cordonnier pegged harvested acreage at 75.2 million acres, below the USDA estimate of 75.7 million.”

The Missouri River flooding issues is perhaps the biggest reason it is difficult for some to project a bearish picture on the grain markets despite the softened demand. With the report due out later this morning the large increase in futures prices yesterday shifted the risk heading into the report from heavy upside potential to more balanced.  Both July and December corn rest just below their previous highs and as we stated last week a catalyst would likely be needed to push prices through these levels. Perhaps the report will be just that or perhaps the slow down in demand from poor ethanol and cattle margins will lead to an increased carryout. Look for our analysis released shortly after the report comes out.

Overnight prices were mostly quiet ahead of the report with mixed prices, corn was -2 to +2, beans steady to 2 higher, meal steady to 1 higher and wheat up 5 to 10 cents.

By this morning prices remain mixed with corn 1 to 4 higher, soybeans 2 to 4 lower, meal steady to -1 and wheat 5 to 8 stronger.

Daily CME spot market prices:

Block cheese: $2.1125 (up 1/4)

Barrel cheese: $2.0675 (Up 1 3/4)

Butter: $2.1000 (Down 1/4)  

Grade A NFDM: $1.6425 (unchanged)

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.

Source:  FCStone/Downes-O'Neill