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

The Class III futures market opened quietly, but quickly caught a bid as GDT results released yesterday continued to be bullish. This was particularly true for SMP which was up 27.8 percent across all contracts. SMP and Cheese hit all-time highs as the fear factor surrounding the supply side continues to perpetuate as New Zealand grapples with its worst drought in nearly 30 years. Based upon the latest weather models, neutral conditions are likely over the coming months, which could allow for a return to more normal production when the dry season comes to an end. Bulls can continue to point to higher late season cull rates, however, as a reason to expect slightly lower production, even if the weather is able to return to normal. As production season winds down and dairy farmers dry herds earlier than expected, there is some talk of seasonal totals off last year’s by some 2 percent ― staggering given the early season double-digit gains. 

Class III futures settled anywhere from -4 to +33 on the day with the July – Dec pack settling at $18.98, 29 cents above its 20-day moving average. Although prices continue to be supported, we are hearing that cheese production is still running strong with longer term fears driving those months higher vs. the nearby contracts which was particularly evident in the GDT results as deferred contracts, at least through the summer months, saw larger gains than the spot contracts.

Spot session results:

Block cheese: $1.6925 (unchanged)

Barrel cheese $1.6125 (up 0.5 cent)

Grade A NFDM: $1.64 (up 5 cents)

Butter: $1.6325 (up 0.25 cent)

In the grain complex, May corn settled down 1 ¾ cents to 640 ½. while soybeans settled up 3 ¼ cents to 1394. As noted yesterday, May corn has lost nearly 15 percent since last week’s report and we noted that said report can best be described as the biggest deviation from estimates to actuals ever. However, can we disregard persistent drought conditions and the reduction of higher yielding acres?  We know that drought conditions declined marginally with roughly 52 percent of the lower-48 in a drought. We have been in a persistent drought for some time, but can this, combined with a decrease of 1.4 million corn acres in vital Corn Belt states, get some to question whether talk of 4-dollar corn is feasible? Although it may be premature to answer this question due to the unpredictability of weather, producers should be thinking about their margins. Should we have another weather event as we did last year, it may make sense to have some sort of protection in place, if even on a small portion of need. Remember, although Class III and corn are correlated, producers may not always see a spike in corn prices reflected in milk prices.

Grain futures traded mixed overnight with corn expected to open steady to 4 cents higher and soybeans 5 to 10 lower.

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