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

It was a monotonous day of trading for Class III futures, as volume clocked in at just 548 contracts leaving the prices to finish mixed Thursday. Class III has seemingly run out of steam to the upside lately, despite the fact that both spot block and barrel prices rose again yesterday. Interesting to note was that Option activity was alive and well with 735 Call Options trading, nearly 3 to 1 over Put Options (280) for a grand total of 1,015 options exchanging hands.  

It could be a combination of cooling temperatures in California and the Midwest along with fresh sell interest for block cheese, but it is becoming rather clear that the market has priced in the bullish sentiment for now. Commercial buyers have interest in both Q3 and Q4 pricing, but have less worry in their blood right now.  In fact, it seems the only thing holding this market back from a corrective move downward is the lack of sell-side activity. We do expect that correction to happen, however, having spent the balance of the week in a very narrow range unable to post new trading highs with any gusto. 

Market bulls were happy to see that cull rates are still running strong after the Memorial Day Holiday. Dairy cow slaughter under federal inspection was up 18.7 percent, at 55,200 head, compared with the same period the previous year. Year-to-date slaughter levels are 3.5 percent higher than 2011 levels, with 1,364,500 head slaughtered.

Soft rains fell upon Iowa, Illinois and Indiana for a few hours yesterday, but the real selling in the grain complex seemed to coincide with the first drops hitting Chicago streets around 10 a.m. yesterday. Corn, soybean and wheat prices plunged by midday, reminding us of just how fickle and difficult weather markets can be to trade. Still, rain didn’t fall everywhere it was needed and the forecasts remain drier than normal, so we can expect some additional volatile trading behavior into the weekend. Look for December corn to break below its 200-day moving average in the mid $5.40’s for another bout of aggressive selling to ensue.

Next Friday, the USDA will release the estimates of June 1 corn and soybean inventories. The level of those stocks will reveal the rate of consumption during the third quarter of the 2011-12 marketing year and the available supply for consumption during the fourth quarter.

We look for corn to open 8 to 10 cents higher and for beans to open 13 to 16 higher. 

Daily CME spot market prices:

Block cheese: $1.625 (up 0.5 cent)

Barrel cheese $1.6275 (up 1.75 cent)

Butter: $1.545 (unchanged)  

Grade A NFDM: $1.2275 (up 0.5 cent)

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