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

Class III futures were lower from the outset of Sunday night trading. And, with an unchanged spot session, prices continued to soften when the grain markets experienced double-digit losses late in the day.

It was an interesting session as volume cleared 1,000 contracts, which typically indicates an active session. But it was difficult to say that as October traded 614 of those contracts alone. That heavy Oct volume meant 2013 saw volume of just over 100 trades on the day. Settlements were 34 to 44 lower in the fourth quarter as the market continues to erode premium versus spot market pricing.

While very few participants we speak to expect to see sharp losses on the spot market, there now seems to be little onus short term to drive the market higher and that means premium must come out of futures contracts. While the technical picture has turned bearish short term, we think it will be difficult for the market to continue to fall at the same pace it has in recent sessions unless the spot market breaks. Perhaps 2013 futures would succumb to further pressure should the grain markets fall sharply after tomorrow morning’s report, as that may help to ease milk production fears, though we fear it would take larger losses than the grain markets could sustain.

The grain complex sold off sharply on Monday as the bulls seem to be exhausted ahead of Wednesday morning’s report. Corn beans and wheat all closed lower by 15 to 18 cents. The selloff wasn’t triggered by fundamental news, as for the most part harvest results remain poor in terms of the yield. But funds/specs have been selling for five straight days, taking profit ahead of the Sept. USDA report which is the most likely blame for the selloff. 

With the pullback seen on prices and support just below the market near the $7.75 mark, we would look to put one of two strategies in place ahead of tomorrow morning. Purchasing physical and buying short dated put options to protect against a potential downside breakout or purchasing calls in case the report triggers a bullish move. Please call to discuss your specific situation.

We look for corn to open 2 to 5 cents higher and for  beans to open mixed -2 to +1.

Daily CME spot market prices:

Block cheese: $1.83 (unchanged)

Barrel cheese $1.775 (unchanged)

Butter: $1.855 (down 1 cent) 

Grade A NFDM: $1.70 (unchanged)

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