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

Class III futures kicked off the month of August on a mostly firm note as concern over hot temperatures Midwest temperatures and high feed costs keep selling at bay. The Midwest weather is controlling the market, tightening both available milk production and available fresh cheese production over the past few weeks. Commercial buyers are on the offensive, locking up prices well into 2012, while producers find it harder and harder to lay off their risk into a historically profitable — albeit inverted — pricing skew.

When the dust settled, over 1,400 contracts exchanged hands from unchanged to 22 cents higher. While the August and September contracts remained well-supported Monday, it was the 4th quarter prices that made a push to new highs in an attempt to reduce the massive spreads plaguing the forward curve for the past week. Still, the CME spot market left something to be desired for market bulls (closing lower for the first time since July 14th) and we anticipate that had it not been for the massive discounts on the 4th quarter pricing, such strength would have been hard to come by.   

It is now a question of who will whittle away whom in the Spot market. On one hand, the fact that over 100 loads of block cheese came to the exchange in July is not overtly bullish — there is block cheese available. On the other hand, buyers have been resolute to not let block prices slip too far behind the seemingly tighter barrel market situation, which has not yet be solved. We expect to wade these choppy waters here again today.  But the longer the prices stay on the defensive — rather than advance to the $2.20 level — the more vulnerable prices become to the downside.

The USDA Dairy Products Report ought to be perceived as bullish for the cheese category, though it may be priced in already as much of the talk over the past few weeks has been about a tighter fresh cheese supply situation, particularly in the upper Midwest. June American cheese production was 364.4 million pounds, down 1.5% from a year ago; Mozzarella cheese production in June was 298.0 million pounds, up 2.6% from a year ago a continued trend of stronger production vs. year ago levels. Though other cheese production came in above expectations, American production was well below, leaving total cheese production lower than expected by just over 5 million pounds.

Cheese futures Friday saw an uptick in both price and trading volume yesterday as buy interest continued to spread well into 2012.  Prices finished unchanged to .043 cents higher on 66 total trades, the bulk of which came in the January to June time period. 

Corn gained back almost all of last Friday’s losses as organized rains this week now appear likely to slip too far north to catch many of the remaining dry spots in western Ohio, Indiana, central southwest Illinois, central and south Missouri and southeastern Iowa. This leaves roughly 1/4 of the Corn Belt under declining conditions without rain.

The USDA Corp Conditions report released Monday afternoon showed corn crop conditions held steady from last week at 62% good to excellent this falls slightly behind a 63.7% 5-year average.  Soybeans didn’t fare quite so well, dropping another 2 percent points to 60 percent good to excellent from last week.  While we’d like all areas to look good to excellent right now, it is simply not the case — though it is completely normal to lose some ground in the ratings game this time of year. 

With cooler temps pulling down from the north by midweek, expect a choppy trade on the corn market for the week.  Supply is critical, but demand will drive the prices. And the USDA will give us another glimpse of their thoughts next week. Will ethanol demand show signs of weakening amid gasoline demand destruction?  Will exports stay strong into the harvest and beyond?  No one knows for sure, but our expectations are for a weaker demand picture from the USDA. We will forward estimates this week

Monday night prices opened with good strength but reversed throughout the night as the U.S. dollar firmed. 

We look for corn to open 3 to 4 cents lower and soybeans to open firm.

Daily CME spot market prices:

Block cheese: $2.1525 (down 0.25 cent)

Barrel cheese: $2.13 (unchanged)

Butter: $2.10 (unchanged)  

Grade A NFDM: $1.51 (unchanged)     

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.