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

The downward momentum in Class III was interrupted with futures settling anywhere from unchanged to +13. That being said, we have our doubts that the gains can extend too far with excess milk and cheese being reported across the Midwest. The bearish sentiment continues to prevail and this move higher on light volume (826 contracts) is likely temporary ― perhaps a small bit of profit-taking evidenced by the drop in open interest. Interestingly, option volume continued to be very strong despite the drop in futures volume with over 950 puts traded and over 1,100 calls. Cash-settled cheese settled anywhere from unchanged to +0.013, once again following Class III’s lead.

USDA Weekly Cold Storage numbers showed a slight decrease in cheese stocks, down 1 percent from the previous week. The National Dairy Product Sales reports cheddar cheese prices for 40-pound blocks averaged $1.74 per pound for the week ending 1-26-13. This is a 1-cent increase from the previous week. Dry whey averaged 65.4 cents per pound for the week, increasing 1 cent as well.

Both of these results were higher than expected and seem likely to support nearby futures higher to start Thursday’s session.

Spot session results:

Block cheese: $1.645 (unchanged)

Barrel cheese $1.53 (down 0.25 cent)

Grade A NFDM: $1.53 (unchanged)

Butter: $1.555 (up 5 cents)

In the grain complex, March Corn settled up 10 ¾ cents on the day to 740.25, while soybeans settled up 27 to 1478.75. Hotter and drier weather in Argentina continues to be a bullish influence and the recent gains have spurred some additional technical buying. Funds have begun increasing their positions this week. Corn and soybeans are nearing very-interesting levels that we’ve talked often about since the Jan USDA report; $7.50 to $7.65 in corn and the $15.00 mark on soybeans are points of major resistance.

Corn was able to be shrug off the weekly ethanol report with production at 770K barrels per day vs. 792K a week ago, the lowest weekly production we’ve seen in the history of this report. If this rate were to continue to year.s end, corn use for ethanol could be cut nearly 200 million bushels. The market will be looking forward to the export sales report early this morning.

We look for corn to open mixed -2 to +2 cents and beans 7 to 10 lower. 

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