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

Class III volume increased Friday to a total of 1,377 contracts, with another build in the open interest. The increasing open interest lends credence to the theory that a bullish trend could be developing in the Class III markets, despite the drop of 3 ½ cents in the block market which brought the blocks/barrels spread back beneath 10 cents. 

The futures had started the day with mostly higher prices, falling hard during and just after the spot session, only to climb higher throughout the rest of the afternoon in part due to strength in the dry whey futures.  The small dip in June’s price capped the surge in the second quarter pack settlement at 14 cents to $16.58, 68 cents higher on the week.  

Although last week finished strong for Class III on a good mix of speculative and commercial buying, further gains seen overnight and into this morning ought to suppress some of that commercial buy interest unless the spot cheese market is able to rise today.

Cheese futures posted 128 trades in a mixed session, with a majority of the day’s trading occurring in the June to September contracts. The changes in settlement prices ranged from down $0.007 in July to an increase of $0.007 in August. The second quarter pack closed the day unchanged at $1.6590, but gained 3.4 cents over the previous Friday. 

The April 2012 Dairy Product Exports report showed total cheese exports for the month at 24,164 MT (53.3 million pounds). This is a 3.3 percent increase over March and a 31 percent increase in cheese exports of the same period last year. Mexico is the largest market for U.S. cheese exports, having imported 20,505 MT (45.2 million pounds) since January of this year, an increase of 16 percent over the same period last year. We expect cheese prices to trade steady to higher to begin the week.

The grain complex as a whole has seen a pure weather and outside market trade, resulting in a race to the top for the entire complex much of last week. Although there were moments of profit taking throughout last week, we saw a fairly consistent march to the upside. The new crop concerns of drought keep traders and farmers on their toes, looking for the Monday and Tuesday rains to see what is real and what seems to be more and more like a head fake. Drought in China, as well, has the market ready for some more gains if the rains don’t come quickly because without record crop to replenish stocks, they will have to have a record import year. 

New crop corn closed at $5.51 even in September and $5.98 in July. Beans were down on Friday with some apparent profit-taking, but have priced a lot of the drought information into the trade. July soybeans settled at $14.26 ¼. Furthering along the weather concerns was the forecast put out by Lanworth which called for corn production at 13.645 billion bushels vs. USDA forecasts for 14.790 billion bushels. Lanworth further estimated bean production at 3.019 billion bushels vs. USDA estimates for 3.205 billion bushels.   

We look for corn to open 4 to 6 cents lower and for beans to open 8 to 11 higher.

Daily CME spot market prices:

Block cheese: $1.615 (down 3.5 cents)

Barrel cheese $1.5225 (unchanged)

Butter: $1.4175 (up 0.75 cent)  

Grade A NFDM: $1.21 (up 2 cents)

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