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

Despite yesterday’s advances in both CME block and barrel cheese, futures traders were less than willing to add on to Tuesday’s “across the board” futures gains. The October Class III contract begrudgingly moved higher to finish up 17 cents on the day to $20.89, yet the November through July contracts fell, settling 1 to 18 cents lower. 

Many traders have given up on the idea of a sizable pullback in spot cheese prices during much, if not all, of the fourth quarter, yet they are still seemingly unwilling to add premium to back months. Bull Spreaders, on the other hand, seem to be more active in recent sessions. Just last Thursday, the October Class III futures contract settled 55 cents under the November contract. Last night, settlements have them trading at the same price. Until solid commercial support comes into deferred contracts, such as NOV, DEC and the 2013’s, it is likely that we will see the bulk of the optimism priced into the front one or two months. It would not surprise us to see Oct trading 30+ cents over November within a week, a retest of that particular spread’s August high.

Front month dairy contracts have been anchored by the rising CME cash markets yet back months have had and will continue to deal with many more macro-variables; the most important one thus far having been feed costs.  December Corn is now trading more than $1.20 off August highs. November Beans are off $2.14 per bushel since the beginning of the month. This decrease is really giving producers an opportunity to hedge a margin now through CME futures, options and swaps. Producers that have yet to offset any of their market risk in Chicago might start looking at both Class III and Class IV futures sales, alongside locking up feed prices either financially or physically; we lean toward options to allow for further price declines .Both Class III & Class IV futures out through March of next year are $19/cwt. or higher. It is also understandable that current futures prices are still not at some producers break-evens which is one reason why we lean toward optionality to allow for better margin opportunities. According to USDA’s monthly Milk Cost of Production estimates, higher feed prices pushed U.S. average milk production costs to another record high in August 2012.  The preliminary August 2012 average total cost was $28.04/cwt., up $1.10 from July 2012, and $4.03/cwt. more than August 2011. The January-August 2012 average is $24.78/cwt., up $2.14 from the same period in 2011.

Fund liquidation in the grain market has been apparent in recent sessions. Funds were net sellers of approximately 15k corn, 12k bean & 4k soymeal contracts yesterday. It’s amazing how a couple of weeks can change the tone of even the biggest bull market. Just a handful of weeks ago, there was talk of possible U.S. corn export bans, biofuel mandate reversals and even a run to $10 corn. Whether the weakness is just a retracement in an overall bull market or a full-fledged reversal, even the most optimistic of bulls are second guessing their positions. Yesterday’s release of Weekly ethanol production didn’t help either. For the week ending Sept. 21, ethanol production averaged 809k bpd, down 25k bpd vs. week prior and the lowest weekly level since July 27. Stocks were down slightly to 19.259 million barrels, yet still stand almost 200k barrels higher than the four-week average. Weekly export sales expected tomorrow have the ability to be a game-changer, yet with all the movement out of South America lately, tomorrow’s report might just be another dud. The overnight session saw an early bounce up following the day session’s selling pressure, but that bounce was just to be sold again as we are lower this morning.

We look for corn the grain complex to open slightly lower

Block cheese: $2.0825 (up 3.25 cents)

Barrel cheese $2.04 (up 4 cents)

Butter: $1.94 (unchanged) 

Grade A NFDM: $1.68 (unchanged)

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