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

Following a big up day Tuesday, yesterday was almost a “nothing” day. 

The market is jostling with the somewhat surprise buy-side strength in spot from Tuesday and spot cheese at psychological support near a nice round number in blocks ($1.50). The heavy put buying relative to limited call trading tells us the market is still bracing for lower moves. However, futures are at key technical support levels and challenging resistance points. It is a tight range between the two and the market is likely to snap sharply out of that tight band, probably soon. We suspect it is to the downside, but the fact that much down-side positioning has occurred over recent weeks tells us that any strength in cheese is likely to garner a snapping backlash from short covering.  

We had called for cheese to get to $1.45 not so long ago and it is very close to that. While we would be surprised by any serious strength here, it is too easy to envision the futures market keeping a premium relative to spot pricing. Adding further caution is that weekly USDA cold storage holdings were reported 2.5 percent lower on the week — the first decrease since Nov. 21.

Much like spot cheese, we had called for spot butter to approach the $1.45 price level; it isn’t there yet, but it isn’t too far away. Look for buyers to nibble in the physical market here but for real demand to be suspect till Easter buying get a real push which is likely to start a little earlier this year than normal by historical standards. Futures continue to price in a slight discount to spot and perpetuate the full cost of carry concept forward, which should incent strong production and the ability or even desire to hold inventory forward.

Weather, rumors on export demand, technical buying, trend followers — all serving to perpetuate the strength in the corn market. We are approaching the 200-day moving average in corn, and while that is likely to slow the upward progress, if that level is broken through and held above, then watch out for another 30- to 40-cent push upward. The newly formed U.S. dollar weakness, contrary to the year’s trend thus far, provided by the Fed’s interest rate announcement yesterday might just well provide the energy needed to break through the 200-day moving average.

Earlier this week, private analyst Oil World pegged the Argentine soybean crop at 48.5 million tons, down 1.5 million tons from just last week, down 3.5 million tons from their December estimate, and now down from last year’s 49.2 million tons crop. Oil World, however, did raise its  2012 Brazilian soybean estimate by a million tons to 72.0 million tons, still down from 72.8 million tons in December and 75.3 million tons last season.

We look for corn to open 7 to 9 cents higher and for beans to open 9 to 12 higher.

Daily CME spot market prices:

Block cheese: $1.5050 (unchanged)

Barrel cheese $1.485 (unchanged)

Butter: $1.56 (unchanged)

Grade A NFDM: $1.45 (unchanged)

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