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

Last Friday saw Class III prices fall after barrel cheese dropped 4 cents. Barrels had been carrying a premium to blocks, and at some point that needed to be corrected. The more bullish scenario would have been if blocks had rallied to go above the barrel price, but even though they did some of the work, rising one cent last Friday, it was a minority share of the work and the market quickly plunged on that. Prices had fallen dramatically, limit down in November, before being bought and rising back to only modest declines in all months other than November which finished down 36 cents. There was some speculation that an error trade was responsible for the swift fall in November Futures Friday. 

It appears as though last week showed signs of a market wanting to flatten out somewhat. The Q1 pack rose 6 cents on the week while the Q4 pack saw a slight drop off of 37 cents. We look for more of that “flattening” market direction early this week as we expect the first half of 2012 to firm.

For the week, dairy cow slaughter under federal inspection was up 7.5%, at 59,000 head, compared with the same period the previous year. Year-to-date slaughter levels are 4.3% higher than 2010 levels, with 2,213,900 head slaughtered.

Grains continued to grind their way higher on Friday as corn closed out the week 1.75 cents higher at 640, beans up 13 at 1270 and wheat up 4.75 at 622.75. It was, however, likely a disappointing day for the bulls as export sales were very strong across the board, and outside markets were very supportive, but corn spent much of the day trading below unchanged despite opening up with near double digit gains on corn. It seems to us that corn, having gained 40 cents on the week, should begin to drag some as harvest pressure and likely slowing demand now that we are back above the $6 mark should begin to drag. We still expect to see final yields come in nearer 150 bushels than to the USDA’s estimate of 148.1, and that should help to ease prices as well.

Beans rallied $1.0525 last week to close at 1263.5. That type of rally, despite the new Chinese buying interest, should also trigger a slowdown in buying and USDA’s yield change went the opposite of trade expectations, but based on reports there we would expect to see that yield begin moving higher come the November report. With little fresh news this week, the market seems likely to us to set back slightly unless the equities can trigger a demand based rally or China continues to have strong buying interest despite the recent sharp price increases.

We look for corn to open 1 to 3 cents lower and beans leading the way but this morning to the downside to open 14 to 17 lower.
Daily CME spot market prices:

Block cheese: $1.69 (up 1 cent)

Barrel cheese $1.69 (down 4 cents)

Butter: $1.835 (unchanged)  

Grade A NFDM: $1.490 (unchanged)

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