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

Class III and cheese pushed higher still, as a neutral to bearish Cold Storage report took a back seat to technical strength and summer weather worries. 

Both markets had strong volume days coupled with strong open interest increases ― all as prices rose. Generally, open interest increases, along with rising prices, indicate a strong direction of trend (in this case, upward). Market tops ― even short-term market tops ― can also, however, be marked by large volume and open interest increasing days. Days like Wednesday, to some degree, may qualify for the latter in the calculus of watching volume and open interest as a means for predicting market direction. We’ll know for sure if we’re sharply lower today.

From a fundamental perspective, the activity of late has us a bit puzzled. Futures markets do a great job of anticipating the news. Information is critical, but the market’s job is to disseminate prices based in large part on expectations. To us, it seems as though we’ve priced in ― at least for now ― the expectation of not only a rise in spot cheese prices here in Chicago (to the mid to high-$1.50’s), but also hotter, supply-debilitating summer weather. 

Could oppressive heat this summer have a material impact on production? Absolutely. Are we there yet? Doesn’t appear so. Because of these factors (to say nothing of the near-term consideration of milk shifting out of Class I utilization as schools break), the Class III and cheese futures markets look aggressively overbought to us today. As such, producers who have been wise to step aside from the $14.00 markets of just three weeks ago ought to reward this rally additional coverage on any milk they would like to protect.

In the grain complex, weather reports remain favorable, energies continue to fall, the EU debacle continues to weigh on global purchasing concerns, the Euro falls, the U.S. dollar rises and I haven’t heard anything bullish grains in the preceding statement… short of weather reports that could spike things upward, we remain bearishly focused on selling rallies or buying calls on dips to protect physical purchases.

We look for corn to open 1 to 3 cents higher and soybeans to open 12 to 15 higher

Daily CME spot market prices:

Block cheese: $1.50 (unchanged)

Barrel cheese $1.47 (up 1 cent)

Butter: $1.385 (unchanged)  

Grade A NFDM: $1.14 (up 1cent)

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