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

Moderate volume of 1,048 contracts pushed Class III futures higher across the board Thursday after the spot block market posted a gain of 4.75 cents to close at $1.6500. Note that as prices rose, both volume and even more so OI increased ― a sign of a trend.

Dry whey futures price increases also had a hand in providing price support through Q1 of 2013, but it was the move in the price of block cheese that provided most of the chatter yesterday. The block price move caused some buyer worry, helped post an intra-day high of around 40 cents on the nearby Class III, and left many participants to wrestle with an unusual 12.75-cent spread between blocks and barrels.  

We’ve had spreads of this magnitude before, but this time it appears more unusual because we just don’t hear of that much fresh cheese tightness in the country today ― certainly not on barrels. Export demand has been good this year ― in some ways better than expected ― but a mid-$1.60 or higher cheese price right now ought to come with the cutting off some would-be potential export demand for Q3. From all we can tell, spot cheese markets would seem to be in balance in the mid-$1.50’s ― not mid-$1.60’s or higher ― right now. We continue to hear that a trading firm (importer/exporter) is caught short physical and getting squeezed. But we caution rumors can be nothing or the smoke leading to the fire.

Nearby July Class III finished at $16.38 ― a good premium to current spot pricing. In fact, $16.38 would be on par with a $1.65 block and a $1.62 barrel price. So the expectation of a 10-cent move higher for barrel cheese today is largely priced in to our from month contract. While it is possible for that to happen today, we still expect that fundamentals would instead push the block cheese price back under $1.60 in the short term.

Cheese futures received a nod from the bullish action yesterday, finishing .001 to .028 cents higher on 160 contracts exchanging hands

The grain complex shelved what (Federal Reserve Chairman Ben) Bernanke said yesterday in favor of what Mr. Bernanke might have said in testimony before a congressional panel yesterday.  The expectation of a QE3 is almost palpable anytime the Fed Chairmen is to get in front of a microphone. But this time he insisted on more of the same, explaining intervention would be done only when warranted. 

Still, the grains had enough gas to burn to the upside on weather concerns. Dryness is not a problem yet, but it could develop as one with only scattered rain foreseen in the 6- to 10-day forecast. While the dryness to date may be the key to good root growth, a lack of rain will be seen as bullish as we enter the ever important pollination period in a few weeks. Expect a choppy trade leading to the USDA Crop Production Report next Tuesday.

We look for corn to open 4 to 6 cents lower and for beans to open 10 to 15 lower. 

Daily CME spot market prices:

Block cheese: $1.65 (up 4.75 cents)

Barrel cheese $1.5225 (unchanged)

Butter: $1.41 (up 0.5 cent)  

Grade A NFDM: $1.19 (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.