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

Class III futures managed just 497 trades Friday in a subdued trading session. Only three 2012 contracts, July, August and September, posted changes in settlement prices which ranged from down 6 to up 16 cents. Class III futures have been pushing higher since June 14th, with the third quarter pack gaining 53 cents, settling Friday at $17.00.

Dairy cow slaughter rate thus far this year is running 3.75 percent higher than the same period in 2011. With the summer’s higher temperatures impacting milk production rates across the nation, the bullish trend looks set to continue in the near term.

The dairy market is looking well supported, some nervousness but people talking about $1.60  per pound cheese as “reasonable” and “cheap” is certainly supportive ― especially when there was a time when $1.60 cheese was the end of the world as we knew it.

It is our opinion that the May Cold Storage data released last Friday is bullish for both cheese and butter. American Cheese rose 0.1 percent from year-ago levels while inventories dropped by 1.5 percent from last month. Seasonally, a decline in American cheese holdings in the month of May has occurred only one other time in the last 10 years ― in 2007. During May 2007,  American cheese inventories declined by 9.44 million pounds versus 9.48 this year.

Total Cheese inventories were essentially unchanged from last month, but fell 1.9 percent from last year, showing that once again butter/powder production has garnered excess milk basically all year so far. The decline from last month is, however, significant for the Total Cheese category as it is the only time in the last 10 years where cheese stocks have declined in total during the month of May. Market bulls will lean on this information ― and to some degree rightly so. However, while that is significant for industry perceptions of potential price upside, we expect that part ― if not all ― of the reason the futures market has risen upwards of 20 percent over the past six weeks is buried in this report.

The grain complex continues to look at the weather forecasts (amidst declining crop conditions), attempting to figure out just what the rain is going to do this week- if in fact it comes. After starting the day down, corn futures settled up anywhere between just 1 and 4 cents with the December contract settling at $5.54 heading into the weekend. Amidst serious heat, precipitation has been subpar to say the least thus far with basically nothing but trace rains over the weekend, and many traders are positioning themselves long accordingly. Beans finished up as well, with Nov beans at 4 ¼ to $13.75 ½. Look for traders to keep getting ling but keep spreads tight into the USDA inventories report next Friday.

We look for corn to open 18 to 22 higher and for beans to open 34 to 42 higher.

Daily CME spot market prices:

Block cheese: $1.625 (unchanged)

Barrel cheese $1.635 (up 0.75 cent)

Butter: $1.52 (down 2.5 cents)  

Grade A NFDM: $1.2275 (unchanged)

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