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

Class III futures ended the week with mixed results on a total of 1,695 trades, as the 2012 contracts settled between six cents lower and five higher, while the first half of 2013 posted gains between unchanged to 15 higher prior to the release of the milk production report for the month of July. The fourth quarter futures pack settled at 20.14, a loss of one penny for the day, but with a gain of 51 cents for the week. 

The milk production report resulted in production increases slightly above our expectations. Total production for the entire U.S. came in at 16.6 billion pounds, 0.73 percent higher than July of last year, while expectations were for a gain of just 0.22 percent. Milk production for the 23 states was 0.8 percent higher than last year at 15.52 billion pounds. June’s milk production for the entire U.S. was revised higher by 2 million pounds (0.1 percent) from the previous report. These results put milk production for the entire U.S. at 2.7 percent higher than during the same period last year. Though milk production was higher than expected, the cow numbers showed a decrease of 12,000 head for the entire U.S., which should push the 2013 contracts higher to start the week, as the drop in cow numbers will continue to adversely affect production totals in the future. 

We expect the nearby dated futures to start the week lower as market participants exit long positions established in expectations of a bullish report ― not to mention the price drops in spot cheese to end last week.

Grain markets ended the week with mixed results. The Dec12 corn contract ended Friday posting a loss of ¼ a penny to $8.07 ¼, with a loss of two cents for the week. The Nov12 soybeans jumped 20 ½ cents to $16.45 ¾, though gained only two cents for the week. Some investment funds have been pulling out of their long positions to capture profits after the recent surge in prices, helping to limit further gains. The grain markets must now contend with a variety of issues to determine price direction, including concerns over the Russian what crop, discounted corn out of Brazil and Argentina making its way to the U.S., and U.S. export demand. Some weather forecasts call for dry conditions through much of the Corn Belt to start the week, though temperatures are expected to cool a bit. Demand will be a key driving force of pricing as the market contends with the drought-ravaged crops. Volatility has really come out of the corn and bean markets over the last week and options expiration is this Friday.

We look for corn to open 7 to 9 cents higher and for beans to open 12 to 15 higher.

Daily CME spot market prices:

Block cheese: $1.87 (down 3 cents)

Barrel cheese $1.835 (down 2 cents)

Butter: $1.7925 (up 0.25 cent)  

Grade A NFDM: $1.65 (up 5 cents)

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