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

The Class III futures finished Tuesday’s pre-holiday trade in a slightly higher fashion on a quiet 532 contracts changing hands. While outside markets ― in particular grains ― rallied into the mid-week 4th of July holiday, we might be best served looking at Tuesday’s trade as consolidation from Monday’s futures price losses.

Although dairy traders will keep a close eye on the grain complex, it is our opinion that a slow-demand holiday week may continue to bring offers to the CME spot market and trump any further grain-complex gains for the balance of the week. And that’s assuming the grain complex, which is materially overbought, continues to climb when it re-opens at 9:30 CDT this morning.

The USDA also offered up a mixed Dairy Products report for May, as people were buying fireworks Tuesday afternoon. The report looked slightly bullish for cheese versus our expectations, as May American cheese production was 375.9 million pounds ― up 0.9 percent from a year ago, but below our estimate for 383.3 million pounds. Mozzarella cheese production fell 2.1 percent from a year ago. No real surprise here as this number goes hand-in-hand with poorer sales in that category since about March of this year. Overall, total cheese production was below expectations at 915.8 million pounds vs. our estimate for 924.7. 

Ultimately, we expect the report to have little impact on a Class III and cheese futures market that is already carrying sizable premiums against a stable to lower spot market this week. Hot weather across much of the U.S. will continue to underpin futures, but be aware the dairy complex has been trading hot weather for weeks now.

Producers ought to look at their profit margins for the balance of the year. Don’t try to keep up with Chicago, just do what you know is right for the dairy. If you are one of those producers who could take advantage of the rally in prices, great. If not, it is fine to sit tight. 

Weather helped prop grains up again Tuesday and high pressure continues to dominate as temperatures throughout the Corn Belt were 90 to 100 degrees yesterday. The six- to 10 day period features mostly below-normal precipitation, except normal in northwestern and far southern crop areas. Temperatures are expected to be above-normal in northern crop areas, slightly above in central areas, but normal in southern crop areas.

As for corn, the 30%+ price increase over the past several weeks has been almost entirely driven by the supply side of the grain equation. The question traders will eventually ask themselves is how we will compete for what was purported to be increasing export demand by the USDA when pegged squarely against a cheaper competitor: Brazil. Not to mention the rationing that is occurring domestically for livestock and ethanol. These may still be on the back-burner this week, but as we re-test all-time contract highs, expect some shifting of thought to the demand side of the balance sheet.

The grain complex will re-open the week’s trade at 9:30 AM CDT. We look for a firm open simply on the fact that there was no material rain over the holiday trading hiatus.      

Daily CME spot market prices:

Block cheese: $1.64 (unchanged)

Barrel cheese $1.675 (unchanged)

Butter: $1.5275 (unchanged)  

Grade A NFDM: $1.2275 (unchanged)

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