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

Class III volume came back a bit yesterday, predominantly in the options. A staggering three out of six dairy markets saw no price changes in any month and two saw no volume. The deferred Class III and cheese futures gained the most in price; the technical charts now confirm a bottom in place and are bullish in medium term structure. From a technical standpoint, there will be setbacks to this bottoming formation and probably sooner rather than later. The fundamental picture is less bullish; in fact, it’s still largely bearish in nature. 

It is the perceived potential weather issues disrupting supply against stable to growing cheese demand in the coming months that sent August 51 cents higher yesterday. June, on the other hand, finished up only 5 cents and is sticking around the downward sloping trend-line.

June is important. June is our lead month. June is now being priced by the CME spot cheese market. And June is having trouble going higher in an environment where other months are rallying and producers selling (across the board) has been noticeably absent. But June has a good deal of premium already built into price (somewhere in the 60-cent neighborhood) and because of that June is vulnerable to trade lower in short order. So, it’s important to recognize a technical shift in the charts from bearish to bullish, but a trend change takes more than a few days to develop. And unless spot cheese moves higher today, June Class III and Cheese may lead futures lower for a while.    

We look to open mixed to higher on follow-through buying, but expect that we need to trade sideways to lower in a consolidation over the next few weeks. We need to establish that there is some worry of fresh cheese tightness out there as well. Product is moving better than it was three weeks ago, but we do not hear much of acute tightness on fresh cheese today. 

China can’t get enough heifers: http://www.abc.net.au/rural/news/content/201205/s3507225.htm

In the grain complex, wheat bumped higher on lingering weather concerns over seas. Corn failed to do much of anything yesterday and beans rallied the most but closed off their highs. We still feel that more likely than not we wind up with a bumper crop when it’s all out of the ground. However, getting to through harvest is a lot of fear, greed and weather to be traded and it will likely be a very volatile several months; especially if the EU situation gets much worse, which it easily could. 

We look for corn to open 7 to 9 cents lower and soybeans to open 8 to 10 lower.

Daily CME spot market prices:

Block cheese: $1.50 (unchanged)

Barrel cheese $1.46 (unchanged)

Butter: $1.385 (up 3 cents)  

Grade A NFDM: $1.125 (unchanged)

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