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

Sellers re-emerged Thursday on technical weakness and whey futures price weakness, coupled with another barrel price decline. Trading volumes declined a bit from the prior day to 1,194 contracts with Open Interest nudging up 136 contracts once the removal of the November contract is considered. What’s important about Open Interest this morning is not the mere shuffling of a few hundred contracts in or out, but that overall Class III Open Interest has now broken below the 20,000 contract mark to 19,481. If we stay below 20,000 to close out the week, it will be the lowest level since January 2003. 

A mix of using options on futures, as well as the birth of the new and growing cheese futures contract, likely explains part of the picture. But we have also seen what amounts to a bit of a stalemate between buy and sell side hedgers over the past few months with regard to 2013 contracts, which currently price at a cheese equivalent of $1.8259. 

Generally speaking, there are more buyers waiting for a number in the $1.70’s cheese equivalent budget number, while producer sellers are seeking some sort of acceptable ― albeit evasive ― profit margin before hedging with futures. They both have their reasons, but the end result means that there is still a lot of hedging business yet to be done for 2013 contracts going forward.

Corn finished lower yesterday, while soybeans held onto positive territory and wheat was sort of caught in the middle. With little fresh weather news, outside of a drying pattern developing in Argentina, the trade focused on export sales. U.S. grain export sales were much better than expected for soybeans and meal, ho-hum for wheat, but just plain lousy for corn. While soybeans and corn have technical resistance levels within spitting distance that ought to keep a lid on prices, the USDA will usher in more fresh news for the grain trade with their Crop Production and Supply/Demand reports. We expect grain prices could edge higher into those reports. 

Block cheese: $1.76 (unchanged)

Barrel cheese $1.66 (down 2 cents)

Grade A NFDM: $1.5575 (unchanged)

Butter: $1.59 (up 0.5 cent)

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