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

Class III prices were mixed on light volume trade early yesterday. And the spot market, trading lower but off of the low in the blocks and closing with a bid for the barrels, left the market mixed but ultimately futures closed with slight gains. Those gains came largely from budget-type commercial hedge orders which appear eager to sop up sell pressure. A $1.65 cheese price for calendar year 2012 is a very attractive number for many end-users who have just recently faced $2.00 prices. In the end, trading volume reached 830 contracts, but 735 of those came from December through the end of the 1st quarter. With the mixed activity, there was little to change our market opinion: we may have a bounce in the short-term, but supply/demand looks for lower prices as we enter 2012.

Fonterra raised its forecasted milk payout by 20 cents to NZ$6.50/kilogram for the 2011/12 season, which would be the third-largest payout on record, but does remain below the Agrifax estimated payout of 6.60. Dairy Australia released its Export Summary last night showing YTD through Oct exports down 4.1% in volume terms and 3.5% in value terms. Milk, mixtures and other cheese were all showing sizeable increases in volume terms despite the overall decline, and butter reported a significant 37.9% decrease in terms of value.

An extremely light cash cheese futures trade was seen as just 4 contracts were traded all coming in February. Interestingly, prices were stronger through much of 2012 despite the lack of volume with prices steady to 0.017 cents higher.

The grain markets continued the mostly lackluster direction-less trade yesterday, opening to near double digit gains, supported by the crude oil market, only to seemingly succumb today to the Dollar strength after mostly ignoring the Dollar movement yesterday. Apart from the outside market influence, trade continues to debate the potential SA draught which is underpinning the market for now despite condition maps showing better ratings this year than last. Wheat also caught fire late in the day and finished up by 16.25 cents as a firming cash market is helping to pull futures higher. Keep an eye on the developing South American situation, but this seems to be a weather worry not any actual crop losses for now affecting the trade, which opens up the market for a potentially even larger drop if the dryness doesn’t come to fruition.

We look for corn to open mixed and for beans to open 1 to 2 cents lower.

Daily CME spot market prices:

Block cheese: $1.60 (down 3.5 cents)

Barrel cheese $1.55 (down 1.75 cents)

Butter: $1.61 (down 1 cent)  

Grade A NFDM: $1.45 (unchanged)

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