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

Class III trading volume climbed back above the 1k mark yesterday with 1,271 trades, as some of that recent volatility in prices returned. November traded a 45-cent range, while December saw a 32-cent range, making lows early in the session before climbing sharply higher during the spot session. Volume continues to be good during the spot market with barrels up 2 cents on 4 trades and blocks up ¾ of a cent on 2 trades. With both the block and barrel settling at 1.72, the historic spread is out of line once again. And, despite the higher futures prices yesterday, the market is still telling us that it expects to see softer prices correct the spread rather than higher prices.

Though spot remains range bound, it continues to be the main price driver and it will remain so despite the fact that 2012 futures fail to heed any attention to it. Perhaps a surprise on this afternoon’s milk production report can trigger some price movement out there. While technical and fundamentals seem to be supportive for the short term, the way the market reacts to bullish news continues to disappoint and perhaps that is the most striking feature of the Class III futures recently.

Grains remain range-bound following the USDA report and despite surprisingly weak export inspections on corn 21 million bushels vs. expectations for 30+ million and very weak overnight trade yet again the corn market closed out the day higher. While we continue to believe (and export inspections show) that Chinese demand is slowed sharply on grains at current levels, this market just won’t break and perhaps we should read into that as a bullish sign?  One thing seems certain given the near 10% break in volatility since last Wednesday and tight trading range since the report that we should see a breakout move in one direction or the other coming soon. Our expectation is that the market will break sharply lower.

This morning, we look for corn to open 3 to 5 higher, beans to open mixed from -2 to +2, meal to open mixed from -1 to +1.

Daily CME spot market prices:

Block cheese: $1.72 (up 0.75 cent)

Barrel cheese $1.72 (up 2 cents)

Butter: $1.86 (up 0.75 cent)  

Grade A NFDM: $1.490 (unchanged)

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