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

Class III prices on Friday continued to climb early on, but were more subdued following a spot session that had the same pattern as most of the week’s activity. Unchanged offers on both the block and the barrel opened the session, but prices were then offered lower to 2.1450. Then, the buyers stepped in and pushed the price right back up to unchanged on 4 total trades. An offer was remaining on both the blocks and the barrels to close out the day and that left futures to trade mostly mixed on strong volume nearly reaching 1,500 trades.

It is now a question of who will whittle away whom in the spot market. On one hand, the fact that over 100 loads of block cheese came to the exchange in July is not overtly bullish — there is block cheese available. On the other hand, buyers have been resolute to not let block prices slip too far behind the seemingly tighter barrel market situation, which has not yet be solved. We expect to wade these choppy waters here again today. But the longer the prices stay on the defensive — rather than advance to the $2.20 level — the more vulnerable prices may become to the downside.

Last week, the Aug to Dec pack average gained 20 cents on the week to close at 19.63 continuing to set fresh new highs. This week, we will get a good bit of new info with dairy products this afternoon, the GDT tomorrow and the bi-weekly international prices on Thursday. The market will be watching all of them, looking to gauge potential demand interest, and weather will once again be a concern with temperatures and humidity at production curbing levels early this week for the Midwest. Forecasts show more moderate temperatures by mid-week.

Cheese futures Friday were mostly quiet with just 11 trades occurring electronically and prices were steady to +0.032 cents as 2012 months were posting the gains on the day. 90 additional contracts were traded via EFR 15 contracts per month from Jan through June 2012 as interest in cheese futures continues to increase in deferred contracts. The Aug through Dec pack average closed the week at 1.9422 up 0.0066 from the previous week and the fourth straight week of gains.

We look for Class III to open slightly higher.

Grain prices plummeted on Friday as poor equities and outside markets weighed as well as continued rains for the Midwest. The market has a very tough job to do right now in terms of quantifying the impact of the heat seen across the Midwest and its impact on final demand. As we said earlier, temperatures are expected to moderate back to a more normal level in many of the near-term forecasts. Most important, the driest southeastern Corn Belt could see better rainfall in the late part of the 6-10 day and then better chances in the 11-15 day outlook. This region, however, is not expected to see the soaking rains it needs.

Ethanol demand may be under assault as U.S. gasoline demand wanes amid higher prices at the pump.  U.S. gasoline demand averaged nearly 8.8 million barrels/day for May — down almost 5% vs. last year, a decade low for the month. The drop speaks to the true impact, both psychological and real, of $4 per gallon gasoline. Gas prices are now lower than May’s numbers but not by much. With a fresh dose of poor weekly corn exports, demand numbers are looking more and more like the USDA will be forced to move targets lower. We will get private estimates this week ahead of next Tuesday’s USDA report.

We look for corn to open 7 to 9 cents higher and soybeans to open 12 to 15 higher.

Daily CME spot market prices:

Block cheese: $2.155 (unchanged)

Barrel cheese: $2.13 (unchanged)

Butter: $2.10 (up 0.5 cent)  

Grade A NFDM: $1.51 (down 1.5 cents)     

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