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

Between school season heating up and Hurricane Isaac putting folks on edge, fluid milk became quite tight over the past week. While that is cooling some now, the trade is still concerned by the fact that producers in many regions ― particularly the West ― still face largely unprofitable conditions that ought to continue to put a kink in the milk supply. The Class III futures market has done a great job of pricing in some of this uncertainty. And although we may still have more upside to go, depending on holiday demand this fall, Thursday’s Class III trading activity was not bullish. After opening firm on follow through technical buying, Class III futures finished weaker amid moderate trading volume Thursday. 

It was likely the spot market that held the greatest influence over Class III prices yesterday as buyers were halted in their tracks. Both blocks and barrels closed slightly lower after having been bid higher initially. Spot buyers are eyeing its relatively low price level compared with premium loaded futures. Sellers, on the other hand, are eyeing the spot market’s relatively high value when pegged against world prices. All of them are staring down a tight milk supply picture. But, for now, the lower close with offers left on the board turned new price highs for some Class III contracts into short-term technical reversals, thereby opening up a vulnerability to a larger price correction heading into early September. But for the most part, until proven differently, “the trend is your friend” and that would mean buying the breaks (bull breaths).

For the week ending Aug. 18, dairy cow slaughter under federal inspection was up 12.5%, at 61,000 head, compared with the same period the previous year. Year-to-date slaughter levels are 5.1% higher than 2011 levels, with 1,918,600 head slaughtered.

The grain markets chopped sideways Thursday with corn futures finishing slightly lower and soybeans and bean meal futures posting lackluster new contract highs (being largely tugged by stronger Chinese soybean prices). Export sales were in line with expectations for soy products, but fell short on corn this week. August may buck the two-month trend of posting new high closes depending on how we finish out today. If corn fails to make a new high close, we expect a brief bout of technical selling early in September in advance of the next big USDA report. 

On the demand side of corn, ethanol volumes reported by the DOE earlier this week held to the latest four-week pace, at 819 million barrels per day. The pace of ethanol has exceeded the latest 11/12’ target with just one week remaining in the crop year. If this run rate of 820,000 barrels per day sticks, the USDA’s new target of 4.5 billion bushels could be too low, forcing more rationing from feed and exports.

The U.S. Dollar index is bumping up against an area of support having spent the past several weeks largely under pressure. Currency traders will likely stay on the sideline ahead of this weekend’s Fed meeting. This meeting has served in the past as a launch pad for announcing massive quantitative easing. However, ahead of the elections, it doesn’t seem likely.

We look for corn to open 2 to 5 cents lower and for beans to open 5 to 8 lower.

Daily CME spot market prices:

Block cheese: $1.8575 (down 1.25 cent)

Barrel cheese $1.8075 (down 0.25 cent)

Butter: $1.84 (unchanged)  

Grade A NFDM: $1.70 (unchanged)

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