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

Yesterday, we saw a decent price change in nearby months (as much as 20 cents up), but on lackluster volume (829 trades). Further supporting the lack of strength behind this move was the lack absence of Open Interest increases yesterday as Open Interest actually fell by 91 contracts. Clearly, there was not a lot of adding new positions during yesterday’s increase, which at best is neutral. Futures have already done a good job of pricing in more upside on the spot market, but with no offers apparent, it’s hard to discern just how high spot can go in the next week or two. If prices get into the mid to high $1.50’s, we suspect that would free up more product. 

The Class III market clearly oversold during its recent consecutive limit down days and should nothing change, we feel that was a glimpse into the pricing we will return to in about a month. The market was faced with falling cheese prices and a fearful reaction to dropping whey prices. Since then, whey has found some calmer, less-fearful participants and cheese has stabilized for the time being. Markets don’t usually stay steady for too long. We look for a choppy trade today, but more strength is likely due in the coming weeks. It’s after that time we expect that prices may resume their downward track. 

In the grains, old crop corn spreads were the key factor during yesterday’s session. Tight farmer holding (perhaps lower production than USDA estimates???) technical strength and strong cash markets led the corn market to the upside. Old crop corn contracts are moving to sharp backwardation in an effort to draw out stocks now, and the continued strength in these spreads cannot be ignored. Backwardated markets are usually a sign of the strongest bull markets. While we think longer term the increase in grain production for the coming year should lead to eventually lower prices, these signs cannot be ignored and we stress again that end-users should be looking to buy call options for upside protection over the coming weeks.

On the day, May corn gained 14.5 cents to 659.50; December corn was up 6 to 568.5, wheat followed with May up 8.25 at 651.25, while meal closed slightly lower, as did soybeans at 1334.5 down 3.25 cents.

We look for corn to open 2 to 4 cents higher and for beans to open 7 to 12 higher.

Daily CME spot market prices:

Block cheese $1.4925 (unchanged)

Barrel cheese $1.5075 (up 0.5 cent)

Butter:  $1.4675 (up 1.75 cent)  

Grade A NFDM: $1.2675 (unchanged)

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