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

Class III futures finished out November on a mixed note, trading decidedly weaker in the front with slight firming into Q2 and Q3 of 2012 on moderate 1,349 contracts. A weaker spot cheese market propelled what started off as modestly lower to more than 60 cents lower (January) intra-day. While a $1.80+ cheese market has attracted sellers all week, spot buyers have not gone away entirely and bids late in the spot session helped to spur futures buying resulting in a rather resilient trade for the balance of the day. By the closing bell, prices finished between .37 lower and .06 higher.

The recent weakness of the nearby contracts pegged and slowly firming deferred contracts has not resulted in a substantially lower forward curve but rather the flattening of slightly discounted prices to spot throughout 2012. In fact, the largest spread for next year is a mere 35 cents.  Historically, the Class III market will flatten out or stabilize like it has before making a definitive directional shift. As for today, we look for further flattening of 2012, but longer term we still expect a cost-of-carry structure to develop as prices shift lower.

Quick-food-service sales typically slow around this time of year. In an effort to combat sluggish sales and up the ante for its competitors, Subway announced yesterday the launch of a $2 six-inch sandwich deal for the month of December. 

By early yesterday morning, the U.S. Federal Reserve and five other central banks agreed to reduce the interest rate on dollar liquidity swap lines by 50 basis points and extend their authorization through February 1, 2013. “The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

The dollar plummeted and the grain complex — along with the stock market — rallied on the news. Although they rallied, they closed well off their highs and in poor-performing price action, thus the market opinions are split: Some are wary of this see it as a sign to sell, others see the creeping action as a sign of consolidation to be followed by a spike upward; we lean toward the bearishness, bulls have to be fed, what will be the next meal? It has been more of a knee-jerk reaction to government lever pulling and button pushing that may not have worked so well for the economy in the very recent past. Regardless, this will likely calm some nerves and pave the way for further short-term strength in the grain complex.

Overnight corn struggled to do much, while wheat and beans remained higher as the U.S. dollar was slightly weaker again.

This morning, we look for corn to open steady and beans to open 4 to 6 higher.

Daily CME spot market prices:

Block cheese: $1.77 (down 4.25 cents)

Barrel cheese $1.72 (down 9.5 cents)

Butter: $1.6575 (down 1 cent)  

Grade A NFDM: $1.45 (unchanged)

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