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

Spot cheese was the attention-grabber on Tuesday, with prices rallying as futures have anticipated. A 6.25-cent gain in the block and 6-cent gain in the barrels allowed for the synthetic spot pricing to gain a bit on futures. Using current spot pricing gives an expected Class III price of 18.40, while September futures closed up 7 on the day at 19.19, a near 80-cent premium. It was a bit of a surprise to see futures in nearby months rally to 20+ cent gains only to move back toward unchanged at settlements with Sept through Feb 2013 just 2 to 12 higher in spite of the big cheese gains. Volume was strong once again, as new highs are enticing strong activity from both sides. Over 1,500 contracts traded. The market will be expecting continued gains from the spot market later today to keep the rally supported.

The grain markets continued to see nervous liquidation yesterday as the USDA report draws nearer. Corn closed down 4.5 cents at 800.50, while beans lost 18.5 cents to 1565.75.

After discussing spreads and backwardation in yesterday’s commentary, it was very interesting to note that corn spreads continued to decline yesterday, while soybean spreads saw backwardation actually increase. Early guesses put average trade estimates near a 126 yield for Friday, leaving many questioning how the report could actually be bullish given that the market seems to be pricing in the absolute worst. However, 126 bpa yield this year would actually be greater, in equivalent terms, than the oft-mentioned drought of 1988… larger yield projected, despite many areas actually drier than they were in 1988, but corn likely more adept to handle those conditions today.

Soybean yield estimates near 37 bpa for Friday continuing to stress an already tight carryout situation. One large bank put their forecast at $20.00 for soybeans over the next couple of months ― a staggering number. Protein pricing is high and, thus, buying soybean meal calls or call spreads is still seemingly the optimal strategy to open up the downside should conditions improve.  

Daily CME spot market prices:

Block cheese: $1.80 (up 6.25 cents)

Barrel cheese $1.7725 (up 6 cents)

Butter: $1.71 (up 2 cents)  

Grade A NFDM: $1.40 (unchanged)

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