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

We often say that traders have short memories. Lately, however, market participants seem focused on price rallies in the early part of 2011 as Class III futures finished the first week of 2012 on almost irrational strength. While we reported that cheese was seemingly in balance last week, which we believe is still the case, some buyers are on edge right now because of a perceived lack of wiggle room on fresh cheese.  Perhaps we’ll enflame those worries during the IDFA Conference in Palm Springs next week. Or maybe they get extinguished. For now, the gain in open interest along with volume over the past several trading sessions demonstrates commercial buy side appetite for future price protection.

Dry whey price also lent a hand to price strength last week. Both Feb and March dry whey futures eclipsed the 70-cent market and finished Friday at their highest levels in more than two years. Strength in dry whey helped boost the January to December Class III average to 60.51 cents, the highest level so far for the 2012 contracts. 

Commercial buy hedgers and dry whey price strength combined to a powerful force Friday. One that allowed traders to shrug off the fact that 14 loads of block cheese traded at unchanged or $1.61 — approximately 7 cents below the February Class III cheese equivalent price.  Yes spot buyers are present, but there are also sellers and they showed up on Friday. When you pour that over ice, the Class III market appears to have matured this latest rally. 

While we expect dry whey can continue higher we don’t know for how long. And with what we expect to be a much stronger U.S. dollar going forward, the dry whey inspired Class III rally today may be better than waiting around for a heat wave to sell this summer.

The grains are showing their vulnerability in a weather rally. South American dry weather has been the talk of the town for weeks and appropriately baked into the futures forward curve.  Some rain was expected last night through early Wednesday in southern Argentina with rains moving north through Argentina Thursday and onto Southern Brazil into next weekend. The weather reports are volatile and erratic and the U.S. dollar is seeing some slight profit-taking this morning, both allowing grains in general to move strongly upward; the question is if the gains can be held through the entire trading session and on that we are doubtful. Our thoughts last week were to buy a 40-cent corn price break from Jan. 4; we have gotten about half the way there. We like call options for those that need product priced, but we use extreme caution when contemplating buying long term into weather market rallies.

We look for corn to open 6 to 8 higher and for beans to open 8 to 11 higher. 

Daily CME spot market prices:

Block cheese: $1.61 (unchanged)

Barrel cheese $1.59 (up 0.5 cent)

Butter: $1.605 (unchanged)  

Grade A NFDM: $1.45 (unchanged)

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.