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

Class III milk contracts across 2013 finished yesterday’s post-holiday trade between 7 cents higher and 12 cents lower. Weakness was front-loaded with the March contract, testing prices in the $16.90s at one point. The March contract, which settled at $17.00 per cwt. yesterday, has fallen more than $1.50 since the New Year was rung in. The entire 2013 pack also has fallen from $18.52 since the beginning of the month to now trade $18.11. The collapse in spot cheese, alongside weakness in dry whey markets, is expected to continue to invert the Class III futures curve. Just 90 days ago, front-month contracts were holding a $2 to $3 premium to deferred contracts. However, the March 2013 contract is now trading more than $1.75 below its early fall counterparts.

Stocks of cheese continued to grow in December, according to the USDA’s Cold Storage report. Total cheese stocks came in at 987.9 million pounds, +5% vs. November but slight lower than December of 2011. American cheese stocks totaled 604.9 million pounds, +4% vs. November but 1% lower than December of 2011. Stocks of American cheese were 4% higher in the Mountain and Pacific regions compared to last year. The inventory build during the month was higher than expected and will likely continue to fuel further offerings in the coming CME spot sessions.

Spot session results:

Block cheese: $1.66 (down 2.75 cent)

Barrel cheese $1.60 (down 3.75 cent)

Grade A NFDM: $1.53 (unchanged)

Butter: $1.505 (unchanged)

It was a mixed day for the grains, with soybeans trading sharply higher due to hot, dry forecasts in Argentina, while wheat prices were sharply lower as China will not lower their 5% import duty for grain imports. On the day, March beans were up 22.5 cents to 1451.75, while March wheat dropped 12 cents to 779.25, and corn was left to languish in the middle, closing a penny higher at 728.5. The market appears to be a bit stalled-out following the January USDA report which was bullish, but not overly so, with negative ethanol and feeding margins and a continued lack of any export business. We continue to look for a moderate corn rally in the coming weeks and would be focused on protecting downside via options should that rally come.

We look for corn to open 1 to 3 cents higher and beans mixed from -4 to +4. 

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