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

There has been a complete lifting of retaliatory tariffs by Mexico against the U.S. inclusive of dairy products. This means that U.S. dairy products will now be free of the 20-25% tariff that had restricted access for certain U.S. dairy products.

Once again, barrels fell as the block/barrel spread reached 3 cents Friday. This time, despite the barrel price decline, futures prices rallied on very light volume. End users continue buying — or have bought — seasonal needs. Reports of large companies being booked through November already are now commonplace. Last week was filled with price volatile amidst two big reports being released (Milk Production & Cold Storage). We see the tightness on cheese product as short-term in nature, and believe that opinion to be widespread enough to keep the market on guard for spec positions must be ready to roll. Moreover, technical indicators show limited upside for 2011 contracts. 2012 commercial buying is obviously present more and more almost each and every day — both in Class III and cheese.

For the week, Q4 Class III prices rose 30 cents to $17.53, while Q1 prices rose just 2 cents to $16.30. We are not sure, but perhaps the widening of that front month vs. deferred month is coming to a slowdown. For the week ending Oct. 21, dairy cow slaughter under federal inspection was up 3.5%, at 56,800 head, compared with the same period the previous year. Year-to-date slaughter levels are 4.2% higher than 2010 levels, with 2,270,700 head slaughtered.

Cold Storage Analysis:

In our opinion, Friday’s Cold Storage Report was neutral for both cheese and butter USDA stocks.

If you were looking for the USDA September Cold Storage Report to move the futures market, Friday’s report will likely disappoint. The USDA reported a typical drawdown in stocks during September, and the data is largely in line with our pre-report expectations. While butter stocks continue to run below the five-year average — for the 18th month in a row to be exact — natural American cheese stocks continue to run well above the five-year average holdings. In fact, the last time American cheese stocks we’re lower than the prior five-year average was exactly 38 months ago: July 2008.  It is a chilling reminder that markets top when inventories are low and bottom when they look burdensome.

Butter inventories rose by 16.3 percent from 2010, while all three categories of cheese (Nat. American, total and other) all showed typical net-out movements in September. American cheese inventories dropped 1.8 percent; total cheese fell by 1.9 percent, and other cheese showed a decline of 3.8 percent from year-ago levels. The best way to characterize the report is: non-event.

Grain spread unwinds looked like a strong theme in last week’s trade. Corn prices, in particular, look range-bound, as does the entire grain complex though. It could be a several weeks until we see a decisive and trending move take form. On the week, Dec corn prices gained 9.25 cents, settling at $6.4925, but last Friday they had traded up double digits and failed to hold on to those gains, which would have been a decisive breakout. Look for more grinding action to come this week and probably a slight price decline on the week to “balance things out.” Also look for beans to gain back some of last week losses against corn and wheat to give some more ground back to corn.

We look for corn to open 9 to 11 cents higher and beans to open 16 to 18 higher.

Daily CME spot market prices:

Block cheese: $1.72 (unchanged)

Barrel cheese $1.69 (down 0.5 cent)

Butter: $1.86 (unchanged)  

Grade A NFDM: $1.490 (unchanged)

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