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

More than 1,220 Class III contracts traded hands during a mostly weaker session Thursday. 

Much of the selling pressure early in the day was reserved for the nearby contracts, but that faded after a stable spot market session. The block market finished unchanged, while the barrels traded unchanged and finished up 0.25 on an unfilled bid.  That resolution, along with a largely expected reporting on weekly dry whey prices, led to a short-covering rally in the nearby contracts. Meanwhile, selling pressure — both speculative as well as farm hedging — sent the June through December contracts sharply lower by mid-day. The result: a narrowing of the forward cost-of-carry pricing skew.

While reports from the country continue to tout plentiful milk supplies consistent with the generally bearish feel and structure to the dairy markets, technical conditions — especially for the nearby contracts — appear largely oversold. Should the spot market close the week on a stable to slightly higher note, we expect to see some pre-weekend short-covering by speculators that ought to cause a swift — albeit potentially short-lived — rally.

According to Dairy Australia the U.S. is not the only country with a burgeoning milk supply.  Milk production rose 6.4% in December while the year-to-date figure showed an overall increase of 3.6%.  We expect to see more of the same in the coming months out of Oceania.

After so many wild post-report grain market swings, the USDA served up a real ho-hum WASDE (World Agricultural Supply and Demand Estimates) report. The numbers were about what traders had expected for U.S. corn, a little better for U.S. soybeans, and below estimates on wheat, while world numbers fell in line for corn and soybeans. World wheat numbers were outside of pre-report estimates to the high side.

U.S. feed grain ending stocks for 2011/12 are  now projected 45 million bushels lower this month, primarily due to increases in corn exports. Exports were adjusted up 50 million bushels as South American weather problems are expected to boost U.S. export business. Corn ending stocks are projected 45 million bushels lower at 801 million bushels.  U.S. soybean supply and demand projections for 2011/12 were unchanged, leaving ending stocks at 275 million bushels. Soybean exports are projected at 1.275 billion bushels, down 226 million from last year.

We look for corn to open 2 to 4 cents lower and for beans to open 8 to 10 lower.

Daily CME spot market prices:

Block cheese: $1.475 (unchanged)

Barrel cheese $1.4775 (up 0.25 cent)

Butter: $1.4325 (down 0.75 cent)

Grade A NFDM: $1.335 (unchanged)

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