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

Class III futures closed out the week strong as the August through December 2012 contracts pushed between 20 and 40 cents, while the contracts of 2013 settled between 15 to 40 cents higher. The July 2012 contract was the outlier of the group, settling one cent lower to $16.67. The July through December 2012 futures pack settled at $18.47, posting a gain of 28 cents on the day, though up just 18 cents from the week prior. 

The market bulls continue to draw inspiration from the unrelenting hot and arid conditions across much of the country. Midwest production per cow is down as much as 20 percent in some areas. Thirty-seven percent of the contiguous U.S. is currently rated as severe to exceptionally dry, a 13 percent increase from the same period last year. The current drought should continue to provide a measure of fundamental support, and the early week selloff helped to temper some of the technically over-bought condition of the market.

The weather rally in grains continued last week. Drought damage is the talk and it has hit essentially every front page of every paper and internet news sites in the country, if not the world, telling us we are likely fast approaching fully cooked.

The Corn Belt is dry and relief has come to some lucky ones. But, as a collective, it is dry and hot. Some things to remember are the record number of acres in the ground, and it seems like at least the edges of the belt may have had some good rains over the weekend. 

December corn closed up 17 ¼ cents on Friday to $7.95 ¾. November beans were up 34 cents to $16.86 ¼ and pushing resistance points out of the way like they are invisible. August beans actually traded limit down momentarily last night as there is a chance the top is in here (unlikely but possible) with talk of rain over the weekend and a debate over what coverage there was is a shift from the last five weeks talk on NO rain. This, coupled with decreases in demand, is at least temporarily negating longer-term weather forecasts filled with heat, humidity and dryness.

We look for the weather to determine the outcome of the trade this week, and continued crop yield estimates to gauge how much damage has already been done and what is left to salvage. It is a price-down morning ― probably a good time for hedgers to buy calls and protect. The rally could be over, but that seems far from certain right now.

Daily CME spot market prices:

Block cheese: $1.7175 (unchanged)

Barrel cheese $1.695 (unchanged)

Butter: $1.59 (up 0.5 cent)  

Grade A NFDM: $1.36 (up 6.25 cents)

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