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

Mother Nature propelled broad-based Class III futures buying as she turned the heat on for another sweltering day throughout the Midwest. One hundred-degree temperatures and another sharp increase in grain prices buoyed futures prices trading volumes (1,232 contracts, over 1,110 calls and just 515 puts) and open interest increases, while deterring traders from focusing too much on loads of cheese brought to the exchange during the spot session (multiple loads of both block and barrel cheese were offered for sale and one load of blocks traded at unchanged).  Both the Dairy Products report and a firming dry whey market also likely lent a hand to buyers.
But, if market participants were worried about cheese becoming tight in the next few weeks, we would have likely seen the month of August lead the pack. It did not. Instead, this weather market caused September through December futures to lead the complex to new highs. The first half of 2013 jumped in the mix, edging towards or just above the $17.00 mark. There may very well be a significant tightening of U.S. milk supply by year end, but the Class III trade of late personifies the expression, "traders shoot first and ask questions later."

We look for weather to continue to be on the forefront of industry chatter. Cooler Midwest weather is forecast for the weekend, along with some precipitation, but these cows need more than a day or two of cooler weather to bounce back. 

The grain markets opened after the holiday by trading right up to the $7.00 mark on December corn, but then working lower from there up until the mid-day weather forecasts showed less rains than previous runs and that triggered yet another strong run moving the market sharply above $7.00. Old crop months are nearly unstoppable in their rally July corn closed up 49.25 at 768, while July beans gained 54.25 to 1626.50. New crop months were strong as well with December corn up 34 at 708.5, soybeans up 51.75 at 1526.5 and wheat up 38.75 at 838. As you can see on the drought monitor images included below, we are in a whole lot of trouble and that is really the sole driver of this rally.

It’s come to this for the majority of the Corn Belt; http://www.youtube.com/watch?v=xsD59v-c1OU

Overnight, the market was beginning to break and for those looking to pick a top with rains forecast for the weekend ahead and a break back below $7.00 this very well may be it. Corn was down nearly 20 cents after having traded over $7, soybeans off over 15 and wheat down near 30 during late evening trade after good rains were forecast for all key wheat growing areas in Australia. It will be a rocky road and Sunday night’s open will all depend upon rainfalls over the weekend (or lack thereof).

Daily CME spot market prices:

Block cheese: $1.64 (unchanged)

Barrel cheese $1.675 (unchanged)

Butter: $1.5275 (unchanged)  

Grade A NFDM: $1.2275 (unchanged)

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