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

Class III traded 1,113 contracts Monday during a mostly lower trading session to start the week.  Weaker dry whey prices, as well, as a stable spot session removed buy-side worry but not the supply of buy orders still underpinning 2012 contracts as we wrap up the month. Both speculative and producer sellers appeared willing to work their orders lower throughout the day, leading to a lackluster decline which wound up well off the intra-day lows, but a decline nonetheless.

As we continue to chop in a relatively tight range lately, we thought it time to step back and take a look at who’s doing what in the marketplace. The CFTC (Commodity Futures Trading Commission government agency) compiles information on who’s trading what every week. It’s called the Commitment of Traders Report.

While the trading activity has been more mixed of late, we’re starting to see a clear change in who’s doing what in the Class III market (at least in terms of hedgers).

Normally, paying attention to what the large speculators are doing is critically important to the overall direction of the markets. If they're LONG, the market is generally going higher. And if they're SHORT, the opposite has proven true in the past. In this case, however, the spec money is slightly short, but it’s not weighted heavily enough to make a compelling case either way. 

The “commercial hedgers” are perhaps more telling right now. Buyers are hedging more than sellers, having added 1,396 positions versus 405 from sellers for the week ending Jan 24, and this kind of shift has been going on for some weeks now. It does not mean that the buyers are wrong, but the direction of the market often times moves against the masses (in the bull market of 2011, commercial hedgers were more SHORT than LONG).  If this holds true, the COT report is shedding light on a weaker – not stronger – Class III futures market to come. 

Corn futures moved lower on some profit taking and outside market pressure. The market gains from last week seemed to have run out of steam as the rains were reported to hit South America. And the U.S. dollar gained. The March 2012 contract settled at $6.31, down 10 cents, and $6.37 was the settlement price in May. It looks as though the European economic problems, as well as the general sentiment surrounding the commodity market, have taken some premium off of the table, pushing all the grain markets down. Bean futures ended down 33 cents to $11.85 ¼ on the day, almost 2.8 percent. Roll into today and it’s a bit of a turnaround Tuesday with the U.S. dollar weaker and talk on grains surrounding Russia to rule in two weeks on a grain duty to put the brakes on exports. Let’s see if today’s market can hold onto the overnight gains throughout the trading session.

We look for corn to open 7 to 9 cents higher and for beans to open 9 to 11 higher.

Daily CME spot market prices:

Block cheese: $1.51 (unchanged)

Barrel cheese $1.495 (unchanged)

Butter: $1.505 (down 4.5 cents)

Grade A NFDM: $1.45 (unchanged)

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