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

Class III futures traded mostly lower early as the heavy volume trade continued. The spot market once again saw an uptick as buyers were aggressive but sellers brought more product to the exchange. When we settled, the block was up 2 cents at 2.1400 with 5 trades and barrels were up ½ a cent at 2.1150 with no trades. The spot sales that hit bids seemed to have deterred futures from rallying hard and instead helped inspire more of a consolidation trade at these lofty levels. Heat in the Midwest also underpinned futures.

Milk Production Report (released Tuesday afternoon)

In our opinion the report was neutral versus expectations. In the top 23 dairy states, milk production was up 1.4%, which was slightly above our estimate for an increase of 1.2%. This report included a revision of May milk production of a 20-million-pound increase. Very little reaction was seen on Class III futures immediately following the report release, though prices were lower than their settlements in post hours trading. While production continues to be in line with estimates and slightly lagging typical growth rates, we continue to arrive at these levels through increased cow numbers and lower milk production per cow.

Following the milk production report, futures showed a little recovery but were still trading slightly lower than their settlement levels. Despite the fresh information of a neutral milk production report and slightly bearish GDT results, this market continues to revolve around the spot market pricing. One wonders if Class III futures would have been sharply lower if not for all the strength seen in the dry whey market yesterday. 

Grains were sharply higher overnight on strength from the surprising decline in crop conditions and continued hot weather across the Midwest. After December corn traded above the 7.00 mark, it quickly softened early this morning — and having failed to hold above that resistance level, prices came well off their highs throughout the day with corn settling at 6.87 ¼,  some 16 cents below its morning high and beans were down 4.25 and 26 cents below their highs.

Given the current USDA numbers, our desire is to sell corn in the short term as it seems unlikely we would make new highs given the slightly higher carryouts.  However, one noted grain researcher, Michael Cordonnier, did drop his expected yield by a bushel per acre to 156.0 below the current USDA, but above last year’s 152.7. That said, corn yields have been raised in the past five August USDA reports.

Certainly volatility is to be expected, and the weather could wreak havoc on yields, but we still firmly believe that grains will be range bound in the coming weeks until the August USDA report and as we are near the upper end of that range we expect softer prices to come along with the expected end of the hot Midwest weather into the weekend.

We look for corn to open 4 to 6 cents higher and for soybeans to open 7 to 10 higher.

 Daily CME spot market prices:

Block cheese: $2.14 (up 2 cents)

Barrel cheese: $2.115 (up 0.5 cent)

Butter: $2.035 (up 0.5 cent)  

Grade A NFDM: $1.525 (down 2.5 cents)     

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