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

Even with flat CME spot cheese markets, Class III futures exploded higher yesterday. The October 2012 Class III contract settled 47 cents higher at $19.68 per hundredweight, and has traded to contract highs during the overnight session. On the day, volume rebounded nicely above the 1k mark as Sept to Dec closed 32 to 47 higher and first half 2013 contracts were 10 to 29 higher.

Interestingly, the large gains came in spite of a lack of any activity in the spot cheese market. Prices have been consolidating of late and shifting from a sharp premium to spot back to a discount and now rebounding to once again carry a rather large premium. Without fresh spot market direction for cheese, traders turned their sights to rising cheese and whey futures, as well as rising spot NFDM & GDT indexes.

The market, after falling the past few days, roared back to life showing the bull run is unlikely over at this point ― though consolidation still seems to be the order of the day in the short run. 

Grain markets have been a mixed bag this week, with basis in the Gulf really steering the ship currently. New crop corn supplies seemed to be weighing upon the market, as basis dropped some 30 cents early in the week with fresh southern U.S. harvest supplies; however, yesterday the soybean basis sparked a rally as it jumped some 25 cents for seven- to 10-day deliveries. The jump in bean basis carried Nov beans to 1634.5 a 36.5 cent gain, while corn, +15 to 804 and wheat, +8 to 866.25 had little choice but to tag along. We don’t believe yesterday’s rally was the start of another sizable bullish run as the market looks to be consolidating, not breaking out.

We look for corn to open 1 to 4 cents higher and for beans to open steady to 5 lower.

Daily CME spot market prices:

Block cheese: $1.8525 (unchanged)

Barrel cheese $1.8125 (unchanged)

Butter: $1.7775 (up 0.25 cent)  

Grade A NFDM: $1.60 (up 5 cents)

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