Editor’s note: This market commentary is provided by the Dairy Division at FCStone in Chicago, Ill.

Grains threw water on a hot spot cheese market as the Class III and cheese markets finished modestly lower on a resurgence of what appears to be producer selling.

In light of a $4.00 handle on corn this week, producers see profit margins ― and also worry about profit margins evaporating ― with each tick lower on corn. They have a case. Cheaper feed often times is followed by more milk as producers feed better and hold onto animals. But we’ve also got to wade through some rather murky production situations caused by heat this summer. Cooler weather continues to quell worries of a sustained loss in production in the Midwest, but Idaho and California are tight on milk. From where we sit, the heat this July will have ripple effects as we work our way through the balance of the third quarter. 

So, as corn and beans felt the wrath of market bears again Thursday, Class III futures had another lackluster trade, registering total Class III volume of just under 900 contracts. Cheese futures actually saw increases in volume coming in at just over 200 contracts (versus 80 day prior). Dry whey finished mixed on better volume – over 100 contracts.   

Overall sentiment by the industry right now is by and large uncertain for the next few months and then bearish 2014. “Uncertain” sentiments generally lead to higher prices for at least a short while ― not lower. And with the monthly block market chart continuing to respect a four-year price trend, we are reluctant to get too “bearish” of nearby cheese or Class III now. Producers ought to look to protect profit margins if prices rise as expected.

Spot session results:

Block cheese: $1.7825 (up 1 cent)

Barrel cheese: $1.76 (up 4 cents)

Grade A NFDM:  $1.775 (unchanged)

Butter: $1.45 (unchanged)

In the grain complex, corn spent the lion’s share of the day under moderate sell pressure.  September led the way lower, finishing under $5.00/bu. for the first time ever. But December also posted new contract lows on Thursday amid technical sell pressure and weak fundamentals. 

Weather is ideal, export sales fell short of expectations, and ethanol production slipped to the lowest level in the last 11 weeks last week.  

Despite good overnight rains for Iowa and Minnesota, the grain markets look poised for a slightly higher open this morning. We look for corn to open steady to 3 cents higher and soybeans 2 to 7 higher.

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