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

Class III Prices were under slight pressure early Tuesday prior to the weak gDT auction results.  It was those figures mixed with aggressive block offers that made a bearish trading cocktail Tuesday. Cheddar prices fell 12.6% on the Fonterra auction. Total volume hit 1,508 as open interest declined by 66 contracts overall. Speculative sellers were the culprit up front and producers appear to be showing more interest in locking up prices in the 2012 contracts – that average now at $16.90 for all of next year and it is trading there.

The weakness held throughout the day even following the spot session where prices traded down 1.5 cents but bounced back yet again on good volume of 9 trades closing just ¼ cent lower. The inability of the futures market to bounce back in the deferred contracts certainly had the look of a market that was overbought and Peter Ulrich had the following comments;

“SUMMARY:  We have been watching milk in all months start to struggle, and top, and some contracts were already on sell signals.  Today the rest of the contracts went on short-term system sell signals. The last time milk topped like this, at this level, it then declined for two years, down to 9.27. Therefore, the risk in milk has grown sharply this week.”

Class III futures will likely need to see the spot market break more than ¼ penny before undertaking further declines, especially given the additional losses seen tonight. That said, it appears that futures are now telling us that is exactly what to expect with Sept through Dec taking a beating today losing 16 to 38 cents overnight. Longer term bear spreads continue to look attractive as 2012 months settled mixed with the 1st half months steady to 10 lower and 2nd half months 1 to 5 higher.

Cheese futures saw good activity with 50 trades taking place yesterday as prices mostly followed Sep through Dec futures lower on the day. A total of 50 trades occurred 48 of them in the fourth quarter months which were down 0.007 to 0.020.

Corn prices began yesterday modestly higher after sizeable declines in crop conditions in four of the five leading corn-producing states on Monday afternoon. That strength just kept building into midday when corn spiked to double-digit gains and then hit stops as Dec corn climbed back above the $7.00 mark. Technically, the market took out all resistance except for the $7.2225 high made June 9th.

On the day, corn settled up the limit 30 cents at 715.75, beans were up 17.75 at 1379.75, meal up 4.9 at 361.0 and wheat finished up 41.5 cents at 718 in Chicago.

We don’t believe now is a time to panic. That being said, our bias heading into the report is that its most likely to be bearish as USDA likely has little chance to account for any lost acreage, outside of the four states being resurveyed, and any massive reduction in yield from USDA would seem unlikely until field surveys can be done.

We look for corn to open 2 to 4 cents lower and soybeans to open 5 to 6 lower. 

 Daily CME spot market prices:

Block cheese: $2.15 (down 0.25 cent)

Barrel cheese: $2.13 (unchanged)

Butter: $2.1025 (up 0.25 cent)  

Grade A NFDM: $1.51 (unchanged)     

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