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

The grain markets continued to get pounded yesterday, with corn and beans closing limit down. The concerns over Japan have hit not just the grain markets but all markets with the force of a magnitude 9 earthquake. As we have noted, Japan is the largest importer of U.S. grains, and with the devastation to the Northeast Coast at least five major ports that were hit by the tsunami are closed down, increasing concerns over the pace of Japanese imports.

That, along with the already-underway technical correction, has given funds the excuse they were looking for to continue reducing positions that were at record long levels just a few short weeks ago. The funds have now shed over about 150,000 contracts over the last month, and an estimated 40,000 contracts today alone, leading corn prices to lose about $1.10 per bushel since the beginning of the month.

All of this activity only increases the complexities of the March 31 planting intentions report, likely the most important planting intentions report in history.

Producers should be looking for an opportunity to lock up their feed needs as the fundamental picture seems to be too tight for this dip to turn into a prolonged decline similar to 2008. As the market looks to be forming a base or turning around again to the upside, we’d recommend protecting additional feed needs. As noted, we have yet to solve the extremely tight acreage situation.

While the situation in Japan is troubling, most of their ports do remain open. And, provided they can avoid a nuclear disaster at the power plants, we expect the panic will subside in very short order.

Here, in the United States dairy markets, extreme volatility continued to hit the class III market yesterday as prices traded sharply lower early April through June all at one point trading 40+ cents lower before the spot session and prices then recovering to nearly unchanged in some months, but sharply off their lows across the board by the time the spot session started.

Cash cheese futures remained very active again, especially from April through July which all traded over 20 contracts. Prices finished the session mixed in spite of the lower class III markets with prices from -0.019 to +0.030.

Overnight futures were extremely quiet with just 10 trades occurring in 2011 months, and prices were showing wide bid offer spreads and mostly steady to higher bids with prices steady to a penny higher in the months which had traded. By this morning, the market remains very quiet with no more trading activity than was seen late last night and prices mostly steady to a few cents higher mostly on bids. Expect futures to open with an upside lean and for spot to be lower, but for buying interest to again be present. Assuming the drop in spot prices can slow, which we believe it will, we would look for the market to close a bit higher as the gap is closed between futures and the spot market.


Dairy: Class III and Cheese

Spot Markets:

Type of Load Trades Settlement Change Bids Offers

Cheese Blocks 7 1.8200 DOWN 6 1 1 Barrels 3 1.8500 DOWN 6 1/4 0 1

NFDM Grade A 0 1.7900 UNCH 0 0 Extra Grade 0 1.8000 UNCH 0 0

Butter Grade AA 0 2.1200 UNCH 0 1

Type Year Ago Month Ago Week Ago 2 Days Ago 1 Day Ago

Blocks 1.2675 1.9375 2.0125 2.0150 1.8800

Barrels 1.2625 1.9000 1.9800 1.9650 1.9125 Historical

Butter 1.4500 2.0650 2.1200 2.1200 2.1200

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.

Source:  FCStone/Downes-O'Neill