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

Class III traded quietly Thursday as the trade is succumbing to a holiday slowdown in activity from market participants. Eight hundred and forty-two contracts traded in a modestly stronger session, with prices ranging from unchanged to .09 higher by the time the closing bell rang. Cheese helped to spur some of that price strength as buyers showed up again and pushed barrels 1 cent higher on the day. We now have a fairly flat spot market, which may have another nickel to the upside in the short-term. However, anecdotal reports still tell of cheese being widely available in the Midwest.

The USDA issued a Cold Storage Report that looks mostly bullish for cheese. For starters, Natural American cheese storage dropped 6.2 percent from last November and 4.7 percent from last month. To illustrate the point further, it was a 28.8 million pound drawdown for November somewhere close to 20 million pounds above the 5-year average. If correct, these numbers show remarkable demand for American cheese last month.

U.S. total cheese inventories fell 5.4 percent from last year and 4.2 percent from last month.  More succinctly, the total cheese picture in November didn’t just dip, but rather plunged below the 21-month, 1 billion pound cheese storage benchmark to 970 million. To put it in perspective, the last time we were at that level was February of 2010 and the swine flu was in full swing.  

But does a bullish report mean prices are poised to go higher? Not necessarily. In fact, we expect that the bulk of any bullishness out of this report is already priced into the market for now.  Perhaps this will be a report we look back at in 8 months and say “that was the beginning of the material decline in cheese holdings,” but that’s a leap today. We don’t think its impact will stave off weakness on Class III — the culprit of which will more aptly be dry whey.

Corn’s recent, short-term rally may have culminated Thursday. After trading as much as much as 7 higher — or to over $6.25/bu for the front-month March contract — the bulls lost their footing and prices fell to just 1 higher on the day. There are likely many reasons for the recent rally, including but not limited to the weather. The other story, of course, is ethanol. The margins have tightened recently, but the industry is still consuming corn at a faster pace than the USDA forecast. Many have disregarded ethanol use lately since the ethanol excise tax credit is likely to expire at the end of the year.

We look for corn to open firm and for beans to open 2 to 4 higher.

Daily CME spot market prices:

Block cheese: $1.5625 (unchanged)

Barrel cheese $1.56 (up 1 cent)

Butter: $1.595 (unchanged)  

Grade A NFDM: $1.45 (unchanged)

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