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

Class III futures were lower throughout the entire session on Monday as sharp declines on grain prices weighed on milk and cheese futures. Class III saw very light volume to open the week as prices traded to double-digit losses early, attempted to turn to the upside when spot cheese prices moved higher, but ultimately failed, ending the day down 5 to 13 cents from Oct through April 13 on a total of 610 trades. Futures stayed lower on the day, despite gains of over a penny for both blocks (+1.25) and barrels (+1.75). Certainly, the spot market coming off of its intraday highs ― blocks traded as high as $1.8975 and barrels $1.8475 ― allowed the market to remain softer into the close. Prices also continued to tick down following the close as some months dropped by as much as 20 cents when the soybean market closed limit down and corn off nearly 35 cents.

The pattern has been established for the spot market ― a slow grind to the upside, and the forward price curve seems to be projecting just that with November pricing in just under $2.00 cheese currently. Cash cheese futures also traded very light volume with just 22 contracts of total volume and all of that from Sept through December. Unlike Class III, however, prices were actually mixed on cheese with Nov closing up 0.012 cents on a lone trade that likely occurred as the spot market was bouncing. Other months were -0.001 to -0.009 in 2012.

Despite the declines on Class III futures, dry whey prices saw a sizeable uptick. Sept through Dec futures were 0.750 to 1.950 higher on the day as 16 trades occurred. The gains were a bit of a surprise due to the timing with other dairy market prices soft and a lack of any discernible underlying bullish fundamental news.

The grain markets experienced an extremely sharp sell-off to open the week. With corn closing down 34 cents at 748, soybeans closing down the limit 70 cents at 1669. The markets got started to the downside on the heels of a sharp Dalian price drop as they experienced the largest one-day loss since 2009 on talk of larger reserves being released by the government. From there, the bearish panic seemed to feed itself as talk of continued harvest pressure and fund liquidations were the driving factors. The market now looking as though it will respect the typical seasonal declines and the charts painting a very bearish picture, with some support just below at ~7.40 but potentially for a more sizeable decline to major support at $6.75. Producers and elevators are also notably heavy sellers as the lack of a carry in the market is driving supplies to be moved today rather than waiting. At times, these flash crashes can be a “bear trap,” though we get the feeling that this market is still ripe to see further declines in the coming sessions. Any physical market ownership bears looking at put options below the market as some are talking of the highs being in until spring now nearly $1.00 above current futures at $8.50.

We look for corn to open steady to 4 cents lower and soybeans 22 to 28 lower.

Daily CME spot market prices:

Block cheese: $1.885 (up 1.25 cent)

Barrel cheese $1.845 (up 1.75 cent)

Butter: $1.85 (unchanged) 

Grade A NFDM: $1.69 (unchanged)

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