Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.

The corrective move lower continued Thursday, as Class III and cheese futures slid lower amid another round of spot market bidding, which pushed the price of block cheese to a new, all-time high price of $2.2950/lb. – a penny better than the high of May 2008.  Barrels too, pushed to a new high of $2.2575/lb., eclipsing the previous high of $2.25/lb. in May of 2008.

Corrections happen in all markets, and Class III or cheese are not immune. The past two days have earmarks of corrective market behavior. Some buy-side speculators are shrugging off, disbelieving in the sustainability of record-high cheese prices. Producer selling has also picked-up in the past two days as sell-side hedgers look to capture $2.50-$4.00/cwt. profit margins through June.

Meanwhile, the action has really created what looks like unsustainable spreads between spot and futures. February is near a $1.00/cwt discount to spot, and March is closing in on a $3.00/cwt. discount.  And with milk production treading water, we look for the spot/futures spreads to narrow in the coming sessions, and for the time-being we expect futures to rebound.  

Today, we look for Class III and cheese to open firm; dry whey to open mixed.

Class IV, butter and NFDM markets all traded lower yesterday on lighter volumes, relatively speaking.  Spot butter fell 4¢ to $1.90/lb., while Grade A NFDM fell 1.5¢ to finish at $2.07/lb. Class IV followed suit, trading lower as bids became scarce.  Is the buy-side belly full of NFDM?  That is the million dollar question, as NFDM has been the leader of dairy bull market over the past 6 months. 

Today, we look for Class IV, butter and NFDM to open steady to slightly higher.
Jan. 23 spot session results:
Block cheese: $2.2950 (up 2.5¢)
Barrel cheese: $2.575 (up 1.5¢)
Grade A NFDM:  $2.07 (down 1.5¢)
Butter: $1.90 (down 4.0¢)

Grain futures
The corn market continues to trade in a rather tight range. The market seems to feel corn has a good value at current levels. Livestock margins, ethanol margins and exports all seem to be working to support current levels. Speculative traders continue to view rallies as selling opportunities.

The soybean market is focused on the prospects of a record South American crop. The window for weather to dramatically change the size of the Brazilian crop is starting to close. Market participants are watching for China to cancel or roll purchases.

The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Any reference to past performance is not indicative of future results. All references to futures/options trading are made solely on behalf of FCStone, LLC. All references to swap execution and bi-lateral swaps are made solely on behalf of INTL Hanley, LLC. FCStone, LLC will clear swaps when applicable. Swaps are only available to eligible counterparties. All observations of economic, political and/or market conditions are not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. and its subsidiaries and should be construed as market commentary. All recommendations to buy or sell a specific derivative or forecasting statements regarding market activity and the pricing thereof should be construed as a solicitation in any jurisdiction in where such an offer or solicitation would be legal. Proper context and guidance including but not limited to the particular trading objectives, financial situations and the needs of the intended audience were taken into consideration when this recommendation was prepared. Contact your account representative for specific advice to meet your specific trading preferences or goals. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. and its subsidiaries. Sources of information believed to reliable were used in preparing such observations, and no guarantee or representation regarding the accuracy of those sources has been made. INTL FCStone Inc. and its subsidiaries are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material.