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

Class III milk futures finished Wednesday’s session, much like they started it ― mixed with a negative undertone. Unlike Tuesday’s session, which also saw steep losses in the grain complex, milk futures were unwilling to bounce like their feed counterparts. 

The complex is torn between two viewpoints. Unrelenting drought and feed prices keeping bullish traders in the pen, but bears are seeing signs that the cash market could see a price drop. Futures price run-ups as seen in recent weeks tend to pull product out of even the strongest hands. Murmurs amongst industry participants, has told of burdensome supplies of “other types of cheese,” as well as a lack of a sustainable export market at these price levels. How much can CWT sustain? 

Some might say what does that have to do with a tight American cheese market, but when most all cheese is priced off of blocks and barrels, sometimes American cheese can turn into a loss leader. Spot traders are more than likely willing to take a load here and there from the cash market, but if heavy supplies come to town, buyers will likely bail and wait for lower prices. This is causing quite a bit of volatility across the board.

Regardless, August through Dec 2012 Class III average settled at $18.55 per cwt., more than $1 premium to today’s spot cheese and whey price equivalent.  Futures across the first half of 2013 settled yesterday at $18.07. 

Technically speaking, the market appears top heavy. It will need a significant tightness of milk supplies and a constant flow of bullish information to hold current levels. Flat cash markets for cheese, lower CWAP last week, and solid production out of Oceania are not the types of stories the market takes well when futures are carrying a premium. However, the NDPSR release of whey prices for week ending July 21 (+1.5 cents @ 51 cents per pound) and a stable grain market is a start -- and should keep Class III in check for now.

In the grain complex, it continues to be a week of price volatility. Rain talk started things off with softness for the first time in about six weeks in the grain complex; demand deterioration added fuel to the fire. Some late, weak longs got forced out by Tuesday as the weather forecasts turned dryer and hotter. The talk quickly shifted back to actual damage, abandoned acres, worsening weather and the like. We reversed and we presumably resumed the bullish trend. Beans are the most volatile because the rain would make the biggest difference, thus they have seen the bigger decline between beans and corn. The corn damage is real and yet to be sorted out thus the “floor’ in prices seems more firm unless we see some serious changes to the demand side of the equation -- potentially mandate reductions by the EPA?

Many institutions out there still have 9-10 dollar corn price targets. This isn’t over quite yet, and clearly corn will not go gently into the night. Buy calls or preferably call spreads to protect exposures, benefit from price declines should they come but don’t let yourself get hit with prices a dollar a bushel (or more) above current valuations. Thirty cents of Class III usually means as much, if not more, to a dairy farmer than a dollar a bushel on corn.

Daily CME spot market prices:

Block cheese: $1.7175 (unchanged)

Barrel cheese $1.695 (unchanged)

Butter: $1.66 (up 3.75 cents)  

Grade A NFDM: $1.375 (unchanged)

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