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

The Class III markets had an interesting start to the week as the market opened looking as though futures wanted to extend last week’s gains. And the spot market seemed to be offering up some support for further gains on futures as the barrel market was bid aggressively out of the gate, resulting in a close of up 3 cents on a single trade. However, traders were more focused on the return of trading to the spot session and a lack of follow through on blocks to the upside. (The last time barrels traded in Chicago was May 15.)  Selling came in quietly at first after the spot session but picked up steam by the close. Class III futures finished steady to 34 lower from June out through the first quarter of 2013 with open interest showing solid gains in July.

While we continue to hear some reports of tightness of product here and there on the large scale, this rally seems to be driven more on longer-term expectations than any real short-term turnaround in fundamentals. Although it looks as though the bottoms are in on Class III futures, it’s difficult for us to believe that the market currently has enough demand to continue to rally after last week’s gains. The current range in our opinion seems to be 15.00 to 16.50, and for now we have a difficult time seeing what will trigger a breakout outside of potentially a very hot summer. We are still looking to sell rallies like last Friday especially as we near what we believe is the upper end of the price range for the time being. We look for a choppy to lower trade today.

The grain markets opened the week mixed as forecasts look to be a bit improved with slightly cooler temps after the very hot Memorial Day weekend and chances for rains toward the end of the week. Wheat prices were under the most pressure as southern U.S. rains as well as better changes for rains in the FSU triggered the declines. Old crop corn continues to be under pressure as the July–Dec spread has come in some 50 cents in just over a week now; however, the old crop corn basis is reportedly on the rise and likely continued to jump yesterday.

On the day wheat traded 23.25 cents lower to 656.75, July corn was down 16 at 562.5, December corn was down 4 at 5225 while soybeans were up 4.25 cents at 1293.5. Interestingly, after the close weekly crop condition ratings showed larger than expected declines with corn down 5% from last week to 72% and wheat down 4% at 54% good/excellent given the expectations we were looking for grains to open the overnight stronger, but the ratings seemed to matter naught as prices were steady to 4 lower by late evening.

Although we have been bearish of the grains for some time, and do expect to see lower prices as we head into fall, the current pricing just over the $5.00 mark is enticing enough for us to begin looking at option strategies to protect against new crop corn purchases if it is suitable. Call to discuss your individual situation.

We look for corn to open slightly higher and soybeans to open 8 to 10 lower.

Daily CME spot market prices:

Block cheese: $1.57 (unchanged)

Barrel cheese $1.50 (up 3 cents)

Butter: $1.3925 (up 0.5 cent)  

Grade A NFDM: $1.1575 (up 0.25 cents)

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.