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

The Class III market bounced back from last week’s selloff into the holiday weekend as the 2012 futures contracts moved between 8 and 22 cents higher. The spot cheese session provided little help as both the blocks and barrels remained unchanged, though the strength produced throughout the GDT auction helped to paint a more bullish outlook. The GDT-TWI priced index leapt 6 percent over the previous report, as global demand for dairy products remains robust. 

Milk production concerns continue to support the Class III market, driven by increasing cull rates as dairy producers face continually high feed costs. We take pause to note a couple important features from yesterday’s session:

  • The volume on the uptick was awfully light at 838 trades, while OI only ticked up slightly (82).
  • The options market in Class III saw barely any calls trade (104), but a large amount of puts (196) in comparison.

With the holiday ending and people coming back from vacations, we must wonder if the spot pressure will return in the short term.

The grain complex closed out the day of trading with mixed results. Dec12 corn pushed 5 ¼ cents higher to $8.05, the first positive gain in three trading sessions, while funds stepped in on the sell side. Weekly corn exports are currently at a near historically slow pace with just 6.3 million bushels versus 24.4 million the same period last year. Some of the export decline is attributed to the disruption of loading in the Gulf created by Hurricane Isaac, while low water levels in major rivers continue to hamper transportation efforts. Another cause of the drop in export demand is the discounted corn coming out of South America, causing importers to switch to the steeply cheaper corn produced there. Three private crop estimates put corn yield between 116.6 and 119 bushels per acre, down significantly from the August USDA estimate of 123.4 bushels. FCStone will release its own crop estimate this Wednesday night.

The Nov12 soybeans settled 11 ¾ cents higher at $17.68 ¼, as there remains widespread concern related to the U.S. crop. There are also concerns related to the South American crop, as projections for their production continue to drop in the face of weather-related issues.  International demand for U.S. beans remain strong, mainly out of China, as weekly exports reached 15.1 million bushels, up from 10 million during the same period last year. Private crop estimates put the soybean yield between 34.5 and 34.9 bushels per acre, much lower than the recent USDA estimate of 36.1 bushels per acre.

For at least a fleeting moment, risk is slightly off again in the world in advance of the ECB meeting tomorrow. The U.S. dollar is firm, energies are taking some off the top, and grains are under light pressure. To see Dec corn trade in the 7.70-7.90 range is very possible near term, but risk is high to see prices supported by poor yields and, thus, call options or call spreads should likely be bought aggressively on down days by end-users.  

We look for corn to open 3 to 6 cents lower and for beans to open 6 to 8 lower. 

Daily CME spot market prices:

Block cheese: $1.82 (unchanged)

Barrel cheese $1.7775 (unchanged)

Butter: $1.86 (up 2 cents) 

Grade A NFDM: $1.70 (unchanged)

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