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

Class III futures finished last week on a quietly lower note, trading just over 900 contracts Friday. Nearby futures posted an early rally that held into the mixed cheese trade Friday. Buyers were the aggressors early in the spot session, pushing blocks up .50 and barrels as much as 3.00 cents higher. But sellers stepped in and capped those gains to only .25 and .75 of a penny by the time the session closed. In return, the Class III buying earlier in the day faded and both prices and enthusiasm for direction closed mixed by the final bell. Overall, the October to December pack lost a material 59 cents on the week, closing at $17.73. Spot cheese averages also finished lower with blocks down 5.75 cents and barrels 4.65 cents lower than the prior week. 

The spot market appears to be etching out some type of price equilibrium over the past week.  Domestic demand appears to be alive and well at current levels, and we suspect that with $1.70 average, price direction will be determined largely by domestic use for the time-being. If we are going higher, it will be on U.S. holiday-buying for the foreseeable future.  Otherwise, with international cheese prices registering in the low $1.80’s and with a stronger U.S. dollar, prices need to come down by a dime or so — at least — in order to reignite export demand enough to make a difference.  And that’s assuming international prices stay stable. Add to that concern over CWT funding, and there is reason to believe the export market could be “turned-off” for a bit.

Commodity investors spent last week again heading for the exit door, causing position liquidation and lower prices across the grain complex. The lion’s share of the pressure is not just the U.S. Fed’s fault. Yes, the U.S. dollar has skyrocketed this month, but emerging liquidity problems at major European banks and more discussions surrounding China’s slowing economy seem to hit commodities with a 1-2 punch last week. And we haven’t mentioned harvest pressure much, but throw that in the mix and a $1.40/bu decline in the price of corn since the beginning of September makes a bit more sense. 

Soybeans made fresh 5-month lows last week, and the one commodity that looks positively cheap relative to corn has a decidedly weaker price future from a technical perspective. We will monitor the soybean and bean meal market closely this week to see if last week’s price action is confirmed or merely a head fake to the downside.

Last week, The International Grains Council cut their 2011/12 global corn production forecast by 4 million tons, to 845 million tons — though that’s still a record and ahead of 826 million tons in 2010/11.

Last Friday, we also had Informa estimates out, which were bearish to beans. Informa raised their bean estimate to 3.092 billion bushels from 3.061 billion. In regards to corn, their estimates were supportive of price as they estimated the crop at 12.62 billion bushels from 12.711 billion bushels. This is a big part of why corn is strong overnight amidst global “thing” liquidation, as beans prices tumble.

This week, we expect the grain markets to moderate their declines some (bounce) while traders turn their focus back to core supply/demand fundamentals relative to grains. The USDA quarterly stocks report is also out this week Friday, which may help to ease selling ahead of that report. We encourage livestock producers to cover some additional 2011 feed needs on this latest price break.

Daily CME spot market prices:

Block cheese: $1.7275 (up 0.25 cent)

Barrel cheese $1.7075 (up 0.75 cent)

Butter: $1.77 (down 1.5 cents)  

Grade A NFDM: $1.490 (unchanged)

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