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

In a marathon, every runner knows setting a pace is crucial to success. So, the question is: Is the break we saw yesterday in Class III an example of this or not?  

With spot cheese moving higher (1.5 cent in blocks and 2.5 cents in barrels) and futures breaking in the front months (-2 in Dec to -16 in August), for the first time in a week we may be seeing the market pace itself on the steep climb higher. At some point during a rally, some profit must be taken…right?  However, this break may very well be a pause that refreshes. We know it’s hot and we know it’s dry ― old news to anyone who has walked outside this summer ― but we are still hearing that cheese manufacturers have adequate milk for production. We also know demand along with the export market has fared well throughout this rally, relatively speaking.  We say this not to negate the validity of the current rally, but to point out that it’s important not to get caught up in its momentum. With this drought in the news cycle nearly every day, risk is heightened of a sell-off. But, for now, we must look at the short-term break as a pause in a bull market until proven otherwise.

On the heels of the big run-up on Monday, it looked like grains had the ammo they needed to continue to move higher with the poor crop condition ratings released Monday afternoon, but the markets never gained momentum as demand is becoming a big concern. Prices are going to have a tough road to sled in continuing to move higher from current levels, and yesterday may have been a bit of a tipping point with the inability to rally on bullish news. Interestingly for the bulls, however, is that September is not gaining on December and the backwardation is typically a very bullish sign. Keep a close eye on that spread, as a further widening there could mean more upside is ahead.

Daily CME spot market prices:

Block cheese: $1.72 (up 1.5 cents)

Barrel cheese $1.725 (up 2.5 cents)

Butter: $1.58 (up 2.5 cents)  

Grade A NFDM: $1.29 (up 2 cents)

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