Editor’s note: This market commentary is provided by Dave Kurzawski, risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

The grain markets started the week on a mixed note as traders rectify the impact of the devastation in Japan and recoil some from last week’s selling pressure. Near-term Japanese demand for inventories of grain (and copper, iron ore, rubber, etc.) will play second fiddle to the health and safety of the Japanese people. And this, perhaps short-term, shift of focus is weighing on traders’ minds as Japan is the U.S.’ No. 1 importer of corn and a major importer of wheat and soybeans.

Chinese demand, on the other hand, is expected to remain very strong. Chinese Agriculture officials said over the weekend that the country’s 2011 soybean imports could exceed 60 million tons, up 9.5 percent from last year. So far, year-to-date imports at 7.4 million tons are up 6 percent from last year.

The overnight markets were hit with a panic as noted above with the fears of larger radiation leaks in Japan. By late evening, corn was down 9.75, soybeans off 12.5 and wheat down 10.5 cents. Grains were far from the only commodity affected as crude oil prices were down over $2 a barrel, copper prices were off over 3 cents, and gold was down 15 points.

We would look for corn to open around 10 cents lower this morning and for soybeans to be down 12 to 15 cents.

Yesterday, the CME spot cheese market experienced the selling pressure that many had been expecting for some time now. The fact that deferred futures were at a discount to current spot prices, as well as the front-month futures contracts, suggested that market participants’ expectations were for spot cheese prices to break rather than for futures to rally.

Yesterday’s 13.5 cent drop in the blocks and 5.25 cent break in the barrels set off strong selling in the futures. The April contract finished limit down and the second quarter contracts lost significant value as well down 55 and 41 in May and June. Volume was heavy especially in the April contract which traded 1,155 times and the May contract which traded 1,062 times.

Total volume for class III futures was 3,819. Options activity was not left out of the mix. Over 3,000 options traded yesterday as well.

However, all of the activity yesterday was not panic selling, as longs liquidated their positions. Strong commercial buying was present and accounted for a good portion of the volume. The second half futures were actually down four to 29 cents, significantly less than nearby months.

With weaker-than-expected cheese exports in January, down 2.6 million pounds, and production continuing to be higher, we can only assume that stocks are continuing to increase and that cheese could continue to make its way to the CME.

Rumors were that the $1.90 level would draw out some export business. We will have to wait and see if they will come to buy today or if the weakness is strong enough to keep them on the sideline for a few sessions.

 

Dairy: Class III and Cheese

Spot Markets:

Type of Load Trades Settlement Change Bids Offers

Cheese Blocks 4 1.8800 DOWN 13 1/2 0 1 Barrels 1 1.9125 DOWN 5 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 0

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

Blocks 1.2675 1.9350 2.0200 2.0125 2.0150

Barrels 1.2625 1.9000 1.9800 1.9650 1.9650 Historical

Butter 1.4500 2.0775 2.1200 2.1200

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Source:  FCStone/Downes-O'Neill