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

Class III futures continued their bounce upward again yesterday. Spot pricing was unchanged with only unanswered, lower bids, in both blocks and barrels.

From what we hear, there is fresh cheese available, but not a whole lot of it; buyers are padding some inventories and preparing for some promotional activity. We take certain note of the fact that cheese buying has failed to propel cheese prices above $1.50/lb and that blocks are holding above barrels. Also, the bulk of the open interest increase having been in March yesterday is yet another sign that this move is relegated to the short term and not too bullish at all.

The Class III futures are in a cost of carry structure through September — although not a full cost structure yet and it is unevenly dispersed. Many buyers are concerned that up front farm losses could impact milk supply later this year and that if we have any weather problems there could be a price spike later on; hence, buy side hedgers are securing deferred product now. We look for weakness to come into the nearby months once again and, following recent activity, we again see opportunity in selling certain nearby months, while buying some of the deferreds.

With dairy farmers entering into significant losses now, the main differences between current times and 2009 are: 1) high beef prices which could allow banks to liquidate and 2) the fact that the general economy is not in free-fall and dairy losses are not overshadowed by greater economic meltdowns. We remain skeptical that liquidations will significantly impact cow numbers lower — primarily due to the large number of replacement heifers available — but if we get any weather disruptions while Oceania is in their off season, then watch out because that’s what has some people on guard.

Daily CME spot market prices:

Block cheese $1.485 (unchanged)

Barrel cheese $1.4725 (unchanged)

Butter:  $1.45 (unchanged)  

Grade A NFDM: $1.2675 (unchanged)

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