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

Class III futures traded lower almost at the open Sunday night and the weakness never went away throughout the session yesterday.

Conditions looked oversold to us, but sell pressure from both speculative and farm interests kept prices in the red all day. Futures finished lower by 11 to 23 cents from March through December. Volume was strong with 1,457 contracts traded and the spot session falling by a penny on the barrels likely in an effort to bring the market back to the normal historical spread. Strong volume on the barrels has lent some support of late, but that buying seems likely to be short-term as inventories are refilled following the Super Bowl and perhaps some building of inventory to run specials in March.

The pressure of nearby months selling off seems to have extended its reach into the latter months of 2012 over the past few sessions, most likely on some farmer selling. And though we remain slightly bearish, some of that selling may be a last-ditch effort to protect breakeven levels. While we believe breakeven levels are for the most part above current futures prices, some farmers may still be finding some value.

NMPF is expecting MILC payments to begin during February and they are projected as of now to continue to be paid through August. Today is the final day for farmers to apply.

The grain markets had a volatile intraday trading session to begin the week as prices opened with sharp gains to pull back intraday, then rally hard on the close. The soybean market led the rally as fresh technical support led the markets highest close since early October. May beans finished up 22.5 cents at 1260 carrying corn to a gain of 7.5 cents at 643 and wheat was up 8.5 at 646.5. Despite the gains, USDA long-term baselines were released at mid-morning showing corn carryout for next year at 1.623 billion, soybean carryout at an implied 289 million bushels, and wheat at 887. These numbers clearly projecting to sharply lower prices for the coming crop year, but unable to affect yesterday’s closing levels.

It seems to us the market is being moved higher mostly on the influence of fund buying as technical signals offer support and potential breakout moves. News of ethanol plants closings continue to make the rounds and an article quoted a Nebraska plant closing due to poor economics today, which will ultimately have an effect on demand. Perhaps a short-term breakout is possible, but we’d look for the market to return to the $6 mark over the coming weeks until spring weather becomes the major focus.

We look for corn to open 4 to 6 cents lower and for beans to open 1 to 1 higher.  

Daily CME spot market prices:

Block cheese: $1.475 (unchanged)

Barrel cheese $1.475 (down 1 cent)

Butter: $1.3925 (down 4 cents)

Grade A NFDM: $1.335 (unchanged)

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