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

The Class III market took quite a beating last week, as the first quarter pack fell 46 cents from the previous Friday’s close to finish off the week at $16.73. Prices stabilized to end the week, finding support at the 50-day moving average. The selloff lost the interests of potential sellers, as prices bounced with the aid of short covering and profit-taking. The futures have entered territory not seen since mid-November, before climbing higher over the next couple weeks. This support level should hold over the next couple sessions, as traders and hedgers re-evaluate their price outlooks.

The selloff could be attributed to a number of factors, including the rollover in whey futures, but the fact that the blocks and barrels have traded below $1.51 for the first time in a year has greatly added to the negative sentiment and seems to have spurred some serious speculative long covering (exiting). Blocks ended at $1.5050; barrels at $1.5025 on the heaviest volume of the week, with eight and five trades, respectively. The $1.50 level could contain some psychological significance amongst traders, and support a short-term pause in the price erosion. Cheese futures followed suit, as the first quarter pack lost $0.0427 on the week to settle at $1.5753.  This new low represents the lowest price this pack has ever traded. Friday’s selling was contained within the first half of 2012, while second-hand prices actually climbed. The Mar12 contract lost the most, three cents, on 31 trades.  Nearby cheese prices could see continued weakness in an effort to narrow the spot vs. futures spread.

The USDA Cold Storage report came out on Friday, and although not much took place in the butter market as a result, the numbers that came out were bearish on the butter numbers, as well as the cheese numbers. Butter stocks grew over 12.4 percent month over month to 105.1 million pounds.  This, with some of the international dry whey prices that we are seeing, will play into the butter and cheese prices next week as they continue to soften. Also, this may be some of the selling pressure that we have been seeing on the spot market, recognizing the increase in stocks.  Spot butter prices closed the week down 4.25 cents.

Grains have become a touch-and-go story ever since the grain report came out two weeks ago, trading below the $6 mark, finding resistance around $5.95, then trading right back into the $6.10 range. Traders think there are signs of increased export demand, thus continuing to add reason to the price climb on top of the constant South American weather news. Many think with the damage to crops in South America, buyers are looking for other places for product and the U.S. could be a major player for some of the new orders. March futures were up 5 and ½ cents to $6.11 and ½. Beans were down after Thursday’s race upward, March beans finished at $11.87 down 10 cents. Look for continued news pressure and weather pressure to guide trading for the foreseeable future. End-users should be buying calls or locking up physical with puts underneath as weather concerns are putting a floor on prices for now and it should be concerning to buyers of these products.

We look for corn to open 6 to 8 cents higher and for beans to open 16 to 18 higher. 

Daily CME spot market prices:

Block cheese: $1.5050 (down 4 cents)

Barrel cheese $1.5025 (down 1.25 cents)

Butter: $1.57 (down 0.75 cent)

Grade A NFDM: $1.45 (unchanged)

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