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

It was a wild week in the spot cheese markets and Class III futures market last week as spot prices spiked higher — blocks up 10.75 cents with barrels gaining 15.25 cents. Nearby Class III months followed along with the November and  December contracts gaining 57 cents to 18.55, clearly lagging the spot gains, while the Q1 pack showed even less confidence in the spot markets closing up just 2 cents on the week at 16.71 and actually posting losses on Friday despite the large spot gains.

Some market participants are telling us they expect to see the cheese markets climb up to the $2.00 mark prior to any price declines being seen. While we respect the short-term market tightness, once holiday buying slows with current price levels some 35 cents above the most recent GDT, the outlook appears more dicey. For now, however, futures — both in 2011 and 2012 — have more (at least short-term) upside risk to them as they are grossly underpriced relative to spot. 

Cheese futures saw a mostly stronger trade on Friday as 79 contracts changed hands. This a bit of a surprise, as Class III prices were mostly lower on the day. Settlements were from 0.014 lower to 0.019 higher and on the week the Nov and Dec pack saw a gain of 6.5 cents up to 1.802. The Q1 pack closed at 1.651 up 0.007 on the week with the gains trailing 2011 months as is the case with Class III reinforcing the belief that the market has little faith in the current gains to hold up.  

Grain prices saw very moderate price changes last week. We have to term it a relatively impressive week as prices were able to hold despite slow export sales, a sharply higher dollar and a lack of yield lowering from pre report private estimates. With the report coming Wednesday morning, it seems there may be a short-term technical spike left on the corn market. But from a wider vantage point, we think that moderating demand and the strengthening dollar will limit the life of any rally. Look for estimates in tomorrow’s version of the morning commentary.  

Some buyers have been asking why DDG prices have not declined along with corn. What we find is since July, reductions in ethanol production for annual maintenance and some plant idling due to higher priced corn, pushed the ratio of DDG to corn prices higher. We expect this ratio to improve through Q4.

We look for corn to open 1 to 3 cents lower and beans to open 1 to 3 lower.

Daily CME spot market prices:

Block cheese $1.88 (up 4.25 cents)

Barrel cheese $1.92 (up 6 cents)

Butter:  $1.8325 (down 2.75 cents)  

Grade A NFDM: $1.430 (unchanged)

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