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

Thursday was a volatile day for nearby Class III futures as follow-through buying from the Dairy Product Sales Report of Wednesday afternoon pushed futures as much as .32 cents higher. But buying faded and sell-pressure picked up steam with the sell-off in barrel cheese prices and mostly lower USDA International Prices.

Barrel cheese fell 5.25 cents on 7 trades to finish at $1.4075, the lowest settlement since Jan. 11, 2011. Blocks were left unchanged, pushing the spread out to 8 cents. Such a spread can last for a short time. But given the general negativity in the marketplace, we expect block sellers to make an appearance sooner rather than later. Still, futures carry a substantial premium to the spot prices and we expect that structure to stay in place, perhaps become more exacerbated with nearby contracts falling harder than deferred months, but that further weakness in spot will lead to the full re-test of the early March lows for Class III contracts through at least the 3rd quarter (ex. $14.20 for May).

Furthermore, a weekly review of the CFTC’s Commitment of Traders Report continues to show that it is the commercial buyer ― not producer seller ― who has more Class III and cheese futures “coverage” for this year. For Class III, Commercial hedge “long positions” ought weighed Commercial hedge “short positions” by over 4,000 futures and options contracts. For cheese, that figure is near 5,000 contracts, both of which corroborates what we see in terms of order flow for both Class III and Cheese futures and options. Commercial buyers are still seeking coverage through year-end with more enthusiasm than dairy farmers. Producers who do not have coverage ought to call to discuss strategy. 

On the other hand, although weather throughout the country is still largely beneficial for the production of milk (even the Central Valley is getting good rain for this time of year), we are reminded by several weather sources of the potential for supply-debilitating heat in the West and Midwest this summer. These are issues; however, the futures market is not overtly concerned with today.

The grain markets rested the bearish trend for a session, as the complex surged higher led by the soybean market. The grains as a whole were supported by a substantial drop in the U.S. dollar, supportive outside market rallies, strong U.S. exports, and talk of an impending overnight frost across parts of the Midwest. May beans closed 19 cents higher at $14.41 with the May wheat close behind, up 11 ¼ cents and settling at $6.39 ¼.  The May corn was the lager of the three, only posting a 1 ½ cent gain to close out at $6.37 ½.  All eyes will be focused on the weather to determine whether this supposed imminent frost takes hold and the duration and damage it may have. Look for the grains to find support into the end of the week.

We look for corn to open 1 to 2 cents higher and for beans to open 1 to 3 higher.

Daily CME spot market prices:

Block cheese: $1.4875 (unchanged)

Barrel cheese $1.4075 (down 5.25 cents)

Butter: $1.425 (unchanged)  

Grade A NFDM: $1.2175 (down 5 cents)

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