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

If you were to look at spot block/barrel market pricing alone yesterday, you might have guessed Class III and cheese futures would have closed at least unchanged if not higher on the day.  You’d be wrong. When the dust settled, the first half 2013 Class III and cheese prices fell precipitously on sharply higher volume trading volumes. Open interest in both markets also grew Thursday, adding winds to the sails of market bears. But why did this happen?

The way we see it, Class III and cheese futures were already slipping into negative territory early in the day as upside trading momentum cooled Wednesday. Then, Mother Nature’s mild weather dialed up bearish sentiment as U.S. producers posted a 1.0 percent increase in milk production during the month of November, which was well above pre-report trade expectations. If would-be futures buyers needed another reason to step aside, the grain complex was also under significant pressure Thursday as March-July corn cracked the $7.00/bu. level for the first time since in six months. 

Given the news above ― and the fact that both Class III and cheese futures have been trading at a substantial premium to the spot cheese market ― it makes some sense that the path of least resistance was to the downside yesterday. But we’d be remiss if we didn’t pay heed to spot block/barrel pricing that is currently acting considerably more bullish than the discussions we’ve had this week concerning fresh cheese availability, a rise in imports, and general lack of demand.

Fundamentally, we see little reason for spot cheese to rise aggressively right now. We also see little worry to catapult Class III or cheese futures in the short-term. Technically, however, we see signs of bottoming in the spot market. There is a possibility the $1.70 mark doesn’t hold, but we think that unlikely at this time. 

In the grain complex, a one-two punch of continued poor demand and some very welcomed Corn Belt moisture led to a precipitous decline yesterday. Additionally, U.S. farmers are finally facing new competition as it was reported earlier this week that two containers totaling just 48 tons of Argentine corn have been accepted by China, officially finalizing the agreement between the two countries. Corn broke below $7.00/bu. for the first time since July 11. March soybeans printed a $13 handle after having eclipsing the $15.00 market just three days earlier. While we ought to expect further weakness going forward, the pre-holiday trade could see a recovery bounce for grain prices after this week’s rout. Moreover, in a week or so the trade will begin to position themselves ahead of the much anticipated Grain Stocks, Crop Production and Supply/Demand reports to be released Jan. 11. We don’t expect those numbers to push prices substantially higher, but buying call option coverage or perhaps some physical needs on current weakness is recommended depending on your situation.

We look for corn to open 2 lower to 5 cents higher and soybeans mixed from 7 to 10 higher.


Block cheese: $1.74 (up 2 cents)

Barrel cheese $1.65 (up 1.25 cent)

Grade A NFDM: $1.5575 (unchanged)

Butter: $1.55 (down 1 cent)

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