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

The Class III market roared back to the upside during the trading session on Wednesday on the heels of a bearish GDT report. The market has seemingly been ripe for a rebound for some time but there was very little to trigger the massive intraday gains that were seen. The spot market saw only 2 bids for the barrels as they moved ½ a cent higher and blocks were unchanged. That ignited a massive rally in nearby futures contracts which were already double digits higher pre spot. The March and April contracts moved to 61 higher and 46 higher respectively shortly following the spot session.

While we have been on the lookout for a potential bounce, the activity still seemed very overdone even intraday based on the news that was out there. Ultimately, not too long after the spot session ended, those nearby futures topped out and began a steady decline into the close. March settled up 23 cents, April up 15 and May up 13 the only months showing double digit gains. From June through Jan 2012 prices were 1 to 7 stronger as the gains in nearby contracts pulled those futures higher from their lower early morning trade. With the large intraday trading ranges and volatility volume was massive with over 1,800 contracts traded.

We would expect to see some additional cheese-buying enter the spot market today and likely push prices a bit higher but we have to think after the significant drop from the highs in March and April those price levels will hold up as highs in the short term. Some deferred contracts will likely see a larger bump in our minds however as a short term spike may bring some longer term commercial type buyers back into the latter parts of the year. The spreads have been very volatile of the past 5 to 10 sessions and we somewhat expect to see them widen back out into a larger cost of carry now that nearby months have rallied.

The grain markets opened the day sharply higher on the strength of the softer USD and a very friendly DOE crude oil report. The highs however were in for the day shortly after the open and by the close divergence was the main market note on the day. Corn and wheat closed sharply lower, corn down 7 at 631 while wheat was down 5 at 634, however beans continued to build their momentum to the upside closing at 1268.75 up 6.25 cents.  Reports of strong Chinese buying interest continue to support the soybean market and the corn bean spread has rebounded to perhaps a more normal ratio in the past week or so as weather in S.A. and strong export sales have triggered a rally while corn suffers a bit from weaker demand and fear of a bearish picture to come on Feb. 24 from the USDA Ag Forum.

We look for corn to open 1 to 3 cents lower and beans to open 6 to 9 lower.

Daily CME spot market prices:

Block cheese: $1.48 (unchanged)

Barrel cheese $1.48 (up 0.5 cent)

Butter: $1.3975 (down 0.25 cent)

Grade A NFDM: $1.335 (unchanged)

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