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

The bull rally exploded aggressively yesterday in Class III and cheese futures. Almost 3k Class III futures traded, over 200 cheese futures, and the options are where it got real interesting. We traded roughly 1,600 puts in Class III, but just 550 calls — tells me prices have got high enough for producers to spend some money on insurance protecting some profit out back.

July-Dec Class III futures hit their yearly contract lows back in the tail end of Feb and since have rallied roughly a dollar ― selling the front and buying the back has worked, as has outright buying, of course.

The main reason for this break-neck turnaround in the dairy complex is largely attributed to what is perceived as tightening milk supplies in general ― and powder supplies in particular ― due to worsening drought in New Zealand and big question marks surrounding U.S. soil moisture for the third year in a row. While we don’t like to argue with drought, it’s important to balance the emotion here. This is not October.  It’s March. And New Zealand is coming off of what is largely expected to be a 1 to 2 percent increase in milk production from last year regardless of having to dry off cows early. There is the potential for this drought to be a really big problem causing higher prices still, but we suspect the market has priced in these fears for now.

Spot session results:

Block cheese: $1.64 (up 2 cents)

Barrel cheese $1.62 (up 2 cents)

Grade A NFDM: $1.52 (up 2 cents)

Butter: $1.70 (unchanged)

Beans ended a six-day losing streak by closing 13 cents higher in May13 to $14.19 ¾. In fact, corn, beans, wheat, meal and bean oil all closed higher yesterday as the U.S. dollar fell for a rare occasion of late. Fund buying was prevalent in all three major grains, and weather concerns buoyed the wheat market as the first official day of spring was unusually cold. Overnight, saw beans take command as the only grain gainer (beans, meal and oil).  

We look for corn to open 2 to 4 cents lower and beans up 8 to 12.

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