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

Class III futures closed the week with solid gains as the spot market continued to pick up. On the week, blocks gained 9.75 cents to 2.1550 with 19 trades on the week, while barrels picked up 1 ½ cents to 2.1250 on just one trade, which we believe goes to show that the barrel market is much tighter at the moment than the block market. The continued strength on the spot market has caused the August-December Class III pack average to rise 52 cents to 19.43 from 18.91. The heat wave which gripped much of the country last week caused production to plummet across much of the Midwest and East Coast, with some producers in Wisconsin reporting production declines ranging from 8 to 20%, with the USDA reporting 10% declines across the country.

Adding fuel to the fire was the surprising cold storage report released after the markets closed on Friday. The report showed that American-style cheeses declined both year-over-year (contra-seasonal and first time since May of 2008) and month-over-month. 

The USDA reported June dairy cow slaughter at 219,000 head, up 2.3% from a year ago, while first-half slaughter of 1.458 million head is up 6.4%. The USDA's cattle inventory report showed the number of milk cows in the country at 9.2 million as of July 1, up 1% from a year earlier. Sources reported to us that auctions are cutting staff as fewer heifers are being offered for sale in both Wisconsin and Michigan, with at least one auction house cutting staff amid the declines —looks like dairymen are holding on to their heifers and building up the herd. We would expect to see the full effects of this about a year out, as the first-lactation cycle typically produces about 10% less milk than the next 3 before “retirement.”  We wouldn’t be surprised by a strong jump in production per cow in the next year or so as these fresh cows head into their second lactation.

Corn saw an eventful week with prices buffeted by a number of factors. On Friday, corn gained 10.75 to 12.50 cents with September settling at 690 while December settled at 685.50. Beans were down 2 cents in September where they settled at 1383 and up 2 cents in November where they settled at 1390. Overnight corn gapped lower, as it seems that the heat wave which gripped most of the grain belt did little damage to corn during the critical pollination period. In fact, reports coming in from the hardest hit areas showed minimal damage. Sunday morning massive amounts of rain fell throughout the Midwest, giving the crop the timely help it needed.

Another issue for grains is the U.S. dollar. The dollar was getting hit this week as European debt concerns took a backseat to concerns about a U.S. debt default, with an Aug.t 2 deadline looming to raise the U.S. debt ceiling. The U.S. will not default. Nonetheless, the dollar got hit and that certainly had an effect on grains. With corn failing to make much of a rally this last week with the weather concerns and declines in the dollar, what will prices look like with a materially better fundamental picture and the bounce the dollar?  We wouldn’t want to be long corn this week, for the news ought to be bearish on many fronts.

We look for corn to open 7 to 9 cents lower and soybeans to open 10 to 12 lower.

 Daily CME spot market prices:

Block cheese: $2.155 (up 1 cent)

Barrel cheese: $2.125 (up 0.75 cent)

Butter: $2.04 (up 0.5 cent)  

Grade A NFDM: $1.525 (unchanged)     

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