A reversal to the upside in spot cheese ignited an unexpected Class III rally Monday — one which we believe is a selling opportunity. The underlying fundamentals have not changed; the languishing demand in this post-holiday buying season is nonetheless present despite CWT having announced another export assistance package for 7.4 million pounds of cheese for delivery between Dec.11 and April 12. This counter-trend bounce is perhaps attributable to the outside market influence which had almost all commodity markets trading higher yesterday. We do feel confident in the opportunity to sell moves like these.

Volume was light early on yesterday as prices firmed. Late in the day follow-through buying turned us just over 1K trades. And open interest actually declined when you remove the NOV activity, telling us that with the volume heavily bunched up front yesterday was probably short-term specs liquidating after they got spooked at spot and pushing the market more than they would have wanted. We look for spot to resume its turbulent move lower over the next few weeks and for futures to follow with 2012 likely headed to a total cost of carry market.

Cash settled cheese futures traded a relatively strong 154 contracts as prices moved in tandem with Class III activity.

The grain complex rallied yesterday mostly on the weakness in the U.S. dollar. Corn moved up nearly a dime, but never even challenged the pivotal six-dollar mark. The trend remains to the downside. We suspect that there will be a tussle around the mid-five-dollar mark, but that ultimately we will challenge the low-five-dollar corn price range before the year is out.

This morning, we look for corn to open 2 to 4 cents higher and beans to open 7 to 9 higher.

Daily CME spot market prices:

Block cheese: $1.8125 (up 2.5 cents)

Barrel cheese $1.82 (up 2 cents)

Butter: $1.66 (up 5 cents)  

Grade A NFDM: $1.45 (unchanged)

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