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

Following the sharp declines seen Monday night, futures looked as though they could bounce back for a time during the spot session as blocks traded 9 times up ¼ of a cent at $1.40. But the market closed lower by a ¼ of a cent on one last trade, and that meant weakness for Class III futures.

The consensus coming out of the Tulare dairy show from the producer community is that break-even levels, mostly from the West Coast, are around $17.00 to $17.25 and many are very nervous with nearby futures prices nearly $2.00/cwt. below that. Unfortunately, little end seems to be in sight to the falling dairy futures markets in the short- to medium-term and Dairy Australia released its Jan milk production report overnight which showed an increase of 5.6% vs. 2011.

Cash cheese futures traded a very robust 613 contracts yesterday to accompany the large volume seen in Class III contracts. Futures losses were sharp but not as bad as those seen in the Class III contracts as the sizeable dry whey declines also had a hand in those sharp declines.

The grain markets saw the recent corn bean divergence continue in a big way to start the holiday shortened week. Markets were higher on the weak U.S. dollar overnight. But corn and wheat plummeted, dragging soybeans along for most of the session, but by the close corn was down 11.75 at 633.5, wheat was down 11 at 636.75 and soybeans came off their lows and closed up 3.25 cents at 1277.

Corn and wheat were weighed upon heavily by the expectation for strong carryout projections from this week’s Ag Forum Thursday and Friday, though there are no trade estimates the consensus is that corn carryout will be somewhere around 1.5 billion bushels nearly twice the carryout projected for this year. Weather issues in South America and lower acreage estimates have soybean carryout remaining tight with a consensus estimate around 250 million bushels down slightly from this year’s 275 mbu estimate.

As mentioned in the Class III section, dairy production margins are very negative and the forward curve provides no relief so feed demand should continue to be soft. Exports have been firm and energy prices are recovering. We remain bearish on grain futures with the market in position to test a downside breakout in the coming days.

We look for corn to open 2 to 4 cents lower and beans to open 4 to 6 lower. 

Daily CME spot market prices:

Block cheese $1.485 (down 0.25 cent)

Barrel cheese $1.48 (unchanged)

Butter:  $1.415 (unchanged)  

Grade A NFDM: $1.2925 (unchanged)

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