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

A tighter-than-expected short-term cheese picture collided with a massive Midwest heat dome Friday to propel Class III prices skyward. Friday morning, the futures markets did little to excite anyone before the spot market. Volume was strong and prices were mixed to weaker….. then came a spot session to change all of that.

We anticipated further declines in spot prices, a recent trend that had already been under way. We anticipated a major plunge lower, not just little dips. Now we go back to the drawing board.  The spot market last Friday began as anticipated with block offers pushing prices down, and futures prices began to plunge lower on that fact. The blocks, which had been pushing lower, turned 5.5 cents higher by session’s end. Panic set in and promptly sent Class III futures limit-up intraday with settlements not far off that in the nearby months. 

Some have suggested that the settlement of the Dean Foods lawsuit for $140 million is a factor in this price rally. We expect to see some follow-through buying on both futures early and potentially during spot as well. On Tuesday, we will get another picture of international prices from Fonterra’s Global Dairy Trade, which will include cheese. It will be telling if prices there remain under pressure and what cheese prices look like tomorrow.

On the week, we traded a lot of block cheese — 43 loads to be exact — and we would have expected that much cheese brought to the exchange to really push prices lower. However, on the week, block prices were only 5.25 cents lower and barrels were up ¾ of a cent. Alongside that spot action, futures were monstrously higher with August having gained $1.04 on the week. The July-Dec pack was up 75 cents ($18.54 vs. $19.29) on the week and the Jan-Dec 2012 pack was up 18 cents on the week ($16.17 vs. $16.35).

Corn continued to gain last Friday closing higher, but well off its highs from that session. People didn’t want to go into the weekend short because of the heat talk and concerns over the crop and its already lagging silking rate.

Be ready for anything as weather will dominate the trade going forward and Friday is an options expiration day.  

We look for corn to open 15 to 18 cents lower and soybeans to open 14 to 15 lower.

Daily CME spot market prices:

Block cheese: $2.0575 (up 5.5 cents)

Barrel cheese: $2.11 (up 0.75 cent)

Butter: $2.03 (unchanged)  

Grade A NFDM: $1.61 (down 1 cent)     

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