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

The Class III market traded just over 1,200 contracts in a mixed fashion Thursday. The trade accepted the Cold Storage report as “bullish leaning,” but it was likely a 1.5-cent move higher in blocks, combined with stronger dry whey futures, that helped buoy nearby futures. Still, significant buy side activity was somewhat in short supply as Q4 contracts continue to trade nearly $1.50/cwt better than current spot pricing. 2012 contracts are willing to carry a significant premium to spot, but unwilling to make fresh highs unless more substantive bullish news flows into the market. Such a scenario could potentially spur a downward price correction for Class III futures in the very short-term.

While the nearby contracts finished firm, 2013 contracts may have started a corrective period Thursday. Price advancements and trading volumes for next year have dwindled over the past several sessions. There may be several reasons for this, including weaker grain prices since Tuesday having played a role in cooling end-user buying down. The important aspect is, however, that buyer sentiment is noticeably less worried Thursday than at the beginning of the week.    

Producers continue to size up potential profit margins and wrap up sales for Q4, while looking ahead to next year’s opportunities. While option activity for 2013 was rather light Thursday,  producers are currently looking at some favorable min/max strategies for the first half of the year. The $17.50 puts (floor) traded against the $21.00 calls (ceiling) at even money yesterday.

For the week ending August 11, dairy cow slaughter under federal inspection was up 7.7 percent, at 57,300 head, compared with the same period the previous year. Year-to-date slaughter levels are 4.9 percent higher than 2011 levels, with 1,857,600 head slaughtered.

Corn futures spent Thursday on an uneventful slide of around 20 cents/bushel in September and December. Soybeans and wheat also finished the day lower, but it appeared corn was the leader of weakness yesterday. The big Friday corn reversal from two-weeks ago still looms as the major resistance to the corn market. It took a huge dose of positive USDA news to get to that peak. It will take a lot of bullish emotions to get through that top. And with weather behind us, quiet demand news in front of us, traders are left drinking from a trough of lackluster Crop Tour results that are, in some instances, actually slightly better that the USDA had predicted. All this spells a price correction ― one that ought to continue today.

We look for corn to open 3 to 5 cents higher and for beans to open 12 to 17 higher.

Daily CME spot market prices:

Block cheese: $1.8525 (up 1.5 cents)

Barrel cheese $1.805 (unchanged)

Butter: $1.80 (unchanged)  

Grade A NFDM: $1.665 (unchanged)

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