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

Class III futures have shown strength for this the final week of 2011, jumping between .04 and .33 cents Thursday on rising volume. 1,556 contracts traded hands yesterday, as the path of least resistance was to the upside amid a good mix of new both commercial buying and speculative short-covering. With blocks unchanged for the past nine spot sessions, it was the two-cent uptick in barrels that fueled buyers. 

While anecdotal reports illustrate a cheese market that is “in balance” at current price levels, we get the impression that fresh surpluses are lean at best and that has some buyers worried. In other words, pure demand is lackluster currently but we’re really not prepared for a demand shock to the system. The result: a .60 to .80 cent premium on Class III to the current spot prices. We can expect some real volatility here today to finish the year, if the spot market doesn’t rally.

Longer-term forecasts for cheese largely fall somewhere in the mid-$1.60’s for 2012. While good arguments can be made for this, this figure is conveniently represented today by the 2012 futures forward curve. While commodities in general — and dairy in particular — may be set up for a year of less volatility, we don’t think so. Either way, we won’t know for another year. So, we suggest that some profitable level be attained by the risk management tools available to you.  Call us to discuss anytime.

Grains took a breather from their week long weather rally Thursday. Most forecasts turned for good rains in most of southern Brazil through the weekend. Argentina remains dry and is still not expected to get much if any precipitation for the next ten days. High temps will be sitting squarely in the 90’s, up to 100 degrees, across the 10 day forecast.  But corn has rallied more than 50 cents inside of two weeks and the trade is focusing more on a very strong U.S. dollar to finish the year now that we have aptly priced in current weather worries. If South American weather worries are enflamed over the weekend, perhaps there is more room to the upside for the grain complex. But, for now, bulls will have to fight the strong headwind of an even stronger bull market: the U.S. Dollar.

We look for corn to open 4 to 6 cents higher and for beans to open 2 to 4 higher.

Daily CME spot market prices:

Block cheese: $1.5625 (unchanged)

Barrel cheese $1.58 (up 2 cents)

Butter: $1.595 (unchanged)  

Grade A NFDM: $1.45 (unchanged)

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