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

A very slow start to 2012 for the dairy futures market as most of the volume and price movement came early in the session, with nearby months jumping higher on stronger grain prices, a lower dollar and stronger outside markets. Each of the first quarter 2012 months traded to double-digit gains, but then the spot session closed quietly with no activity. Following that quiet spot session, prices fell from their highs with January ultimately closing down 12 cents; February closed higher by 16 cents on heavy volume of 357 contracts, and 233 contracts came in Jan as well. January and February volume of 590 contracts was a vast majority of the 857 total trades. Despite the low Class III volume on futures options, activity was fairly active with over 500 calls traded.

The Dairy Products report released by the USDA showed less total cheese production, which would be supportive. But despite the declines, more American cheese was produced, which could keep spot prices steady. With futures continuing to carry a premium, we would look for some buy side interest to show up in the spot market today. If prices can’t make a push higher, we’d expect to see the futures market decline. In fact, futures may be vulnerable to a decline, having potentially already priced in a slight New Year Bounce to spot cheese.

The grain markets opened sharply higher after the long break, with soybeans the clear leader as drought concerns that are affecting South American corn seem likely to have an impact on beans in the near future as well, given the continued dry forecasts for Argentina. Interestingly, as the market neared 665 in March corn strong resistance was found and prices closed well off the highs. The 100 and 200 day moving averages sit right near that level and a gap was left just below the market from 648 to 654. It seems to us there is a strong possibility, with the January report coming next week, that gap will likely want to fill ahead of the potential breakout move. While soybean prices led the charge higher, with March beans closing at 1227.5 — up 19.75 cents — prices were well below their intra-day high of 1244.5.

Daily CME spot market prices:

Block cheese: $1.5625 (unchanged)

Barrel cheese $1.58 (unchanged)

Butter: $1.60 (up 0.5 cent)  

Grade A NFDM: $1.45 (unchanged)

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