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

Mad cow may not be a joking matter, but the impact to the market is madness, or at least has been historically. You have likely heard by now of the report that a cow was found in California with mad cow disease. Markets sell off on the news of mad cow and then tend to rebound after nothing happens.  

The official USDA press release says this looks to be a very isolated case, and a very rare form of the disease. It appears that the initial market reaction on beef prices was overdone as the market came off of a limit lower move. Dairy futures have sold off slightly this afternoon as the news entered the market but we don’t expect to see a continued significant reaction in terms of pricing on dairy futures.  

Beef prices were limit down yesterday and then came up from that after the close trading higher in the overnight session. It appears that the trigger happy reaction was not a sound strategy and the gun shy are being rewarded as all things that sold off on the news are higher such as grains and livestock. Dairy however has once again sown its remarkable ability to remain counter trend as it closed up strongly yesterday and then sold off in the early part of its evening session. Will more cows be found? The USDA leads us to believe it’s an isolated incident ― the first such incident in six years. We must believe them for now but remain guarded. Right now, the dairy industry desperately needs a high beef price as milk prices sag and on farm losses begin to mount.

We noted the bear trend but also said yesterday morning that Monday’s sell-off was strong and that a bounce back would not be a surprise but a welcomed selling opportunity. As we said yesterday, “Straight down from here on cheese and milk?  Probably not.  For one there is buy side interest around the $1.50 mark.”  And we hold onto this belief.  Volume was finally pretty good on an up day (1,532 contracts of Class III and 115 CSC) but OI failed to confirm again as Class III OI increased by much less than on down days (84). Barrel prices fell 1.5 cents in an active session but blocks held, and both blocks and barrels may hold through month end.  But at this time, given the information at hand, it looks like a policy of selling market rallies for producer hedgers is a good one. Price rallies will come, but unless we can lean on a summer weather problem or a serious increase in dairy product exports, we’re not out of the woods yet.  And mad cow just throws another wrench in the situation.

While Class III rebounded, Class IV continued to sink on offers alone. No trades occurred, to be clear, but prices fell anywhere from 4 to 23 cents.

In the grain complex…. up, up and then a rally got trampled by a mad cow stampede. July went from about 9 higher to close four and a half lower- the power of fear and greed, the power of a scare. The U.S. dollar has been soft and Chinese buying has propelled both corn and beans. The bear is at least napping; the bullish longer-term trends have overtaken short-term bear chart challenges and while not completely negated yet, the bear is certainly napping. If we sell rallies in milk, we must also buy dips in corn or at least buy calls -- something to protect what could get/stay wild.

We look for corn to open 2 to 5 cents higher and for beans to open 18 to 24 higher.

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