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

Standard & Poor's changed its outlook on U.S. debt to negative, and that drove a sharp drop in the major market measures Monday. Many look at this as a “shot across the bow” to politicians who are taking too long to get their budget act together. The only problem is that S&P are the same good folks who rated garbage Collateralized Debt Obligations as AAA, so it can be said that their judgment is worthless. We shall reserve comment, but recognize that the bottom line is that their statements move markets

Class III volume was once again light with 700 contracts traded. Volume has now been low on both price rallies and declines.

The May through July 2011 Class III contacts were 38 to 49 cents lower on Monday following what could be considered a spot cheese market spread correction. The barrels did, in fact, lose 2 cents in value, but the block cheese price held steady at $1.6275. The spread is now near historical levels, and today may be critical in determining the next trend. If barrel prices are pressured again and levels are not defended, we could see blocks follow suit. This scenario would have a bearish impact on Class III prices and we could see a retest of the early April lows.

Cash Cheese futures were very quiet yesterday. Only two trades took place and prices were under pressure down as much as 4 cents in June. Futures continue to carry a premium to the current spot market prices and have a long way to go to give back the premium they are carrying. The premium in the forward curve continues to suggest that traders are expecting higher cheese prices, as June is priced at $1.71. Short-term weakness is seemingly expected, while bullish sentiment remains in the medium/long-term.

Meanwhile, the grain complex opened weaker on Monday morning, but quickly reversed course as wheat futures led the rally on continued weather and thoughts of supply tightening by increased use of wheat as animal feed. Soybeans prices shrugged off the South American export activity that has quieted the bid here in the states in favor of following the rest of the grain complex higher. 

Corn, too, is moving firmly into a weather driven market this week. Traders will likely place their orders based more on their view of weather than anything else. And the weather has uncertain at best, lousy at worst, and forecasts for much of the Corn Belt don’t call for much change this week.

The USDA Weekly Crop Progress Report showed that 7 percent of the corn crop is planted — slightly below the five-year average of 8 percent and versus 16 percent planted last year. In all fairness, farmers got an early start last year and the deadly storms that crossed the U.S. during the past several days did not help the crop planting/production situation. But, remember, when traders worry about planting weather, there is always more worry in the price structure than anybody thinks. When the weather clears, prices usually slide and quickly. That said, even Goldman Sachs & Co.’s two sell recommendation did little to dent the grain prices or slow the bullish momentum thus far.

We look for corn to open 4 to 6 cents higher this morning and beans to open 1 to 3 higher.

CME spot market prices:

Block cheese:  $1.6275 (no change)  

Barrel cheese:  $1.6050 (down 2 cents) 

Butter:  $2.00 (no change) 

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Source:  FCStone/Downes-O'Neill