Editor’s note: This market commentary is provided by Dave Kurzawski and Eric Meyer, risk-management consultants with FC Stone/Downes-O’Neill, Chicago, Ill.

Class III futures volume perked up on Friday along with third quarter prices, up 23-29 cents as CME spot cheese prices closed out the week on a strong note.

Friday's trade was first given a shot in the arm with a strong weekly NASS report for block cheese. For the week ending June 19, CME Block Cheese prices were reported at $1.4414. While that number was down 1.67 cents vs. the previous week, this figure was significantly higher than the $1.3730 CME Block weekly average from June 7-11. The consistent premium in NASS cheese prices to comparable NASS report averages started June and July futures off on a positive note. A higher spot cheese market along with a passing CWT deadline may have also contributed to Friday's gains.

Looking at the open interest changes from Friday, it would appear that short covering was likely the culprit for the gains in third quarter futures. But are traders waiting for a better time to sell this market or are they ready to be long? We believe that speculative traders are lightening their positions -- even if still bearish the overall cheese market — for fear of a summer rally.

Cheese fundamentals are the laggard of dairy industry right now. However, bullish indicators that include strong butter/cream prices, a failure for dry whey prices to break, the potential for summer heat and a seasonal increase in cheese demand lead us to believe that the potential for higher prices is there as we head into July. Class III futures are trading unchanged to five cents lower on light volume overnight but we expect a mixed opening as traders wait to confirm if cheese prices will make another run to $1.50 over the next couple of weeks. We think it may be a short trip back to the year's high block cheese price.

CME spot butter prices rose another penny on Friday to settle at $1.72. Futures finished 1/4 to a penny higher on light volume. At this point, only the November futures contract is priced at the current CME spot level, all other months are pricing at a discount. For the near term, butter futures have lined up in bullish fashion. In dry whey futures, second- half 2011 pricing was not just a one-day fluke, but still looks overpriced given the current market. Oct-Dec 2011 average is pricing at $0.42. CME spot NFDM prices held steady on Friday after a two day decline in Extra Grade. With offers becoming more and more aggressive in both futures as well as the OTC market, we believe that spot prices in the mid-$1.20s are presently too high.

This week, the USDA will be publishing the Acreage report on Wednesday morning along with the May Dairy Products Production report on Thursday afternoon. We will provide you with estimates of both reports prior to their release.

Bearish weather seems to be winning against bullish Chinese demand lately in Chicago. Corn prices fell for the fifth straight session Friday and were lower overnight. The market is looking somewhat oversold as it approaches the lows placed in the first week of June. Still, it doesn't take extensive analysis to recognize that corn prices have fallen with more ease than they have risen during the past 30 days. We suspect there is significant weather premium baked into the corn market.  It may be too soon to erode all of that premium this week, but we expect that traders will do just that over the next 60 days. If you need some level of protection, buying corn and soybean meal call options above the current market makes sense to us. We remain wholly bearish grain complex prices right now, but protection is protection is protection.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010122.pdf

6/25  Class III Futures:   Volume:  1,147  Open Interest (OI) Change:  +151  Total OI:  29,122
6/25  Class III Options:   Est. Put Volume:  205   Total OI:  21,391   Est. Call Volume:  199  Total OI:  20,405
6/25  Spot Markets:   Block Cheese $1.4100 (UP 1 1/4),  Barrel Cheese $1.3950 (UP 2 1/2),  Butter $1.72 (UP 1),  NFDM: A $1.25 (UNCH),  X $1.2450  (UNCH)

6/25  Other Dairy Futures Volume:   Butter:  27   Dry Whey:  15    NFDM: 12    Class IV:  0   CHEESE:  20
6/25 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul - $1.423               UNCH                Vol:  0                OI Change:  UNCH
Aug - $1.471        UNCH                Vol:  0                OI Change:  UNCH
Sep -$1.533        UP .003        Vol:  0                OI Change:  UNCH
Oct - $1.55              UNCH                Vol:  0                OI Change:  UNCH
Nov -$1.545             DOWN .005        Vol:  10               OI Change:  UP 10
Dec -$1.545       DOWN .005        Vol:  10                OI Change:  UP 10

6/25 Individual Class III Futures Prices, Change, Volume & Open Interest
Jun - $13.63      UP 4                Vol:  13                OI Change:  UP 13
Jul - $13.55        UP 25                 Vol:  240                OI Change:  DOWN 29
Aug - $13.85      UP 23                Vol:  236         OI Change:  DOWN 4
Sep - $14.64       UP 29                Vol:  146          OI Change:  DOWN 32
Oct - $14.68       UP 5                Vol:  39                OI Change:  DOWN 8
Jul-Dec 2010 Avg:  $14.30                      UP 0.15/cwt
Jan-Dec 2011 Avg:  $14.35                   DOWN 0.16/cwt

Source:  FCStone/Downes-O'Neill