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

You just can’t break a trend in the dairy markets it seems! Once again, the spot market moved lower as volume was a bit stronger than earlier in the week. But despite the lower spot market, Class III futures were mostly higher from -3 to +9. While the path of least resistance for spot has been to the downside, futures continue to chop sideways to higher over the past few days. If spot continues to decline again today, futures are vulnerable to more sell pressure. However, the wall of budget-setting buy interest for 2012 is wide and deep and that ought to continue to underpin futures here today. Eventually, prices ought to work through the bids and move lower so long as spot cheese stays lethargic, which we believe is possible heading into the new year. 

Stepping back some, it’s important to consider our currency markets and the pivotal levels that have been breached here this trading week. The U.S. Dollar Index cleared resistance at 80 while the Euro broke below support at 1.30. Although those markets reversed shortly after “taking out” those levels, it appears to be a shot-across-the-bow for further strength in the U.S. dollar and further weakness for the Euro. (NOTE: normally markets breach significant “levels” and reverse for a period of time). 

Indeed, the future of these currencies may have been foreshadowed this mild week in December.  The headwind a stronger dollar creates is already hacking away at most commodity futures markets and killing some: gold fell below its 200-day moving average for the first time in nearly 3 years this week. So, while the dollar is not the be-all and end-all for commodity prices, it surely has a hand in price direction. And after this week, the risk appears to be lower for U.S. commodities as we roll into next year. 

The milk production report will be released on Monday and our expectations are included below. Weekly slaughter was back to the previous norm following Thanksgiving week at 61,000 head, giving some longer-term pause to the steady increase in supply. 

South American weather concerns continue to support the soybean market but grains were softer on weak export sales and mixed outside markets. Chatter of potentially larger than expected acreage abandonment to come in the January report against vastly expanding world acreage continues to create a mixed outlook. Light volume trading makes it seem unlikely that the market will be able to breakout in either direction and thus far the market acts as though it’s unwilling to do so. We’ll keep an eye out expecting to see prices fall and reiterate yesterday’s comments that puts should be owned against any long positions.

We look for corn to open mixed and for beans to open 3 to 6 higher.

Daily CME spot market prices:

Block cheese: $1.57 (down 1.75 cent)

Barrel cheese $1.5375 (down 0.25 cent)

Butter: $1.6025 (up 1.25 cent)  

Grade A NFDM: $1.45 (unchanged)

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