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

Not much excitement to report in the Class III market, as just over 500 contracts traded hands on Tuesday. Price changes were minimal with the range established with May dropping eight cents, while December posted the high gain of just four. It might just be that traders are taking a break before the next downward surge because fundamentally this market is still heavy, though it is worth noting that the drop in the spot market failed to inspire the sell side from stepping up. The market is moving ever so slightly back to a carry.  

Cheese futures managed just 150 trades in the face of the 4.5-cent drop in blocks and 1.5-cent drop in barrels. The spread between the two prices has narrowed to just four cents after lingering in the 10-cent range for some time. The narrowing move came as most traders expected, with the blocks falling, slipping below the $1.50. We expect Class III and cheese futures prices to experience more downward pressure early today. The surprise would be more stability for spot and firming futures prices.

 If you talk to anyone in the dairy industry, there is milk aplenty from sea to shining sea. In fact, we continue to hear reports in the Midwest of milk being sold for $3-4 under Class III and out West we have reports of it selling for $4 under Class IV. We know co-ops such as CDI and LOL ― among some others ― instituted milk production caps not too long ago. And now Darigold, too, has initiated a similar program. Everyone is running full and we are confident that milk is even being dumped. So, the supply situation continues to be bearish. 

The demand side of the equation, however, is more murky. We hear of soft fresh cheddar demand in the country, but if we were to go simply on what we hear in the country we would have expected $1.30 cheese three weeks ago. The spot cheese market in Chicago ― while lower yesterday ― is still basically trading sideways. 

The grain markets finished the day mixed, but with a substantial erosion of gains posted early in the trading day. Strong demand continues to bolster these markets, though heavy selling, led by funds in the soybean market, pushed prices lower through the close. The rapid planting rates and lack of any weather threat in the near term have helped to lower new crop prices, but they are at the trading whim of the tighter old crop situation right now. Outside markets added to the negative tone of the day with a stronger U.S. dollar and slumping energy and stock prices. Beans appear to have put in at least a short term top and are selling off aggressively- this should lead to weakness in corn but thus far corn has proved resilient on old crop concerns (pegging the U.S. against the world ― in particular China ― bidding for a limited supply).

We look for corn to open 1 to 2 cents lower and for beans to open 6 to 10 lower.

Daily CME spot market prices:

Block cheese: $1.4925 (down 4.25 cents)

Barrel cheese $1.4525 (down 1.5 cent)

Butter: $1.30 (down 1 cent)  

Grade A NFDM: $1.1275 (down 1 cent)

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