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

Class III futures finished Thursday’s trade mixed after an early day recovery from Wednesday’s losses. Specifically, 1,183 contracts exchanged hands as traders largely squared up positions ahead of the much-anticipated June Milk Production Report. 2013 contracts, on the other hand, continued their ascent. Deferred market illiquidity is playing a role in the price increases for the second half of next year, as what appears to be commercial hedge buy interest continues to seek coverage.

The bullish beat goes on as far as U.S. milk production is concerned. 

The USDA reported yesterday that total U.S. milk production was up only 0.92 percent over last year against our estimate for an increase of 1.2 percent. A sharp decline in milk cows, as well as lower milk production per cow, led to the sharp drop month over month of 2.7 percent on a daily-average basis.

The report may inspire light buying overnight and into this morning, but the lion’s share of this report is well-priced into a significantly over-bought 2012 (and possibly 2013) Class III futures market. We’re not saying that the potential for negative milk production growth is not a real, ongoing threat for future prices ― just that futures market prices have well adjusted for these kinds of production figures for now. Add to that the slightly weaker spot cheese and dry whey futures prices, and we have a recipe for a downward correction on prices in the short-term.

A new all-time corn market trading high was made in the wee hours of Thursday morning, as September corn printed $8.16 ¾ a bushel. Soybean meal also posted an all-time trading high of $521.50 a ton. We are in the throes of a disastrous weather market. And, although isolated thundershowers were reported during the past 24 hours, most of the Corn Belt received no rains. 

Private analyst Michael Cordonnier, who provides research commentary for INTL FCStone, has lowered his estimate of the U.S. average corn yield by six bushels per acre, to 140 bpa, with his minimum yield scenario remaining at 125 bpa and his maximum yield scenario at 145 bpa. He reduced his U.S. soybean average yield estimate 1 bushel per acre to 39 bpa, using a range of 35 to 41 bpa.

Daily CME spot market prices:

Block cheese: $1.7175 (down 0.25 cent)

Barrel cheese $1.695 (down 0.25 cent)

Butter: $1.585 (up 0.5 cent)  

Grade A NFDM: $1.2975 (up 0.75 cent)

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