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

The Class III market shelved what was an otherwise bearish-tilting Milk Production report, which was released Friday afternoon, in favor of addressing the wide futures/spot cheese spread during Monday’s trade. Prices extended gains from Sunday’s overnight session well into yesterday morning. December and January turned lower as sellers sounded off at the beginning of the spot cheese trade, but we’re quickly taken on their offer by both block and barrel buyers.  When the dust settled, blocks finished only ¼ lower on four trades, while barrels closed unchanged from Friday after trading a penny higher intra-session. Nearby futures rallied abruptly on the spot activity, which eventually spread deeper into the 2012 contracts. 

We’ve fielded many calls on why the futures market was so strong today. Our best answer is that the futures market led the spot lower having kept a healthy discount — indeed a negative bias — in place for weeks now. As of Friday’s settlement of $18.27 for December 2011 Class III, that discount was somewhere in the neighborhood of 12 cents on a cheese equivalent basis. Such a discount was unsustainable against Monday’s stable spot pricing and a classic bear bounce ensued. Meanwhile, commercial buyers appear more aggressive in mid-2012 futures and beyond, helping to underpin Class III across the board, which settled between .01 and .38 higher from December 2011 to January 2013.

Look for continued strength on Class III early today. Producers should be using this strength to their risk management advantage. If selling futures is not a feasible strategy giving the still lofty price of feed, look to build a floor price for your milk throughout 2012 by using put options. For example, the January to December $15.50 puts (floor) traded against the $18.50 calls (ceiling) on Monday, which may be a good min/max type strategy to begin with depending on your situation. Call to ask questions and discuss.

The grain complex continued to slide today amid a firming U.S. dollar and a lack of any fresh bullish news. But the selling seemed to be losing steam by the end of the day, so we expect a bounce for corn, soy and wheat to materialize today. That said, Friday’s Commitment of Traders Report shows that speculative money is getting short soybeans and wheat. Nearly all of the speculative long contracts are in corn nowadays, which may say something more about the speculative proclivity to hedge their bets than a stance on corn being bullish.

China imported 304,000 tons of corn in October. Most of that came from the U.S. But the total January to October corn import figure is 938,000 tons (918,500 from the U.S.) are still down 37 percent from last year’s pace.

Soybean imports in China were pegged at 3.8 million tons, up just slightly from last year — 3.07 million tons of that was from South America. January to October soybean imports came in around 41.5 million tons show a decline of percent from last year.  Is China cooling off?

This morning, we look for corn to open 1 to 3 cents higher and beans to open 2 to 4 higher.

Daily CME spot market prices:

Block cheese $1.83 (down 0.25 cent)

Barrel cheese: $1.87 (unchanged)

Butter:  $1.63 (down 1.75 cents)  

Grade A NFDM: $1.45 (unchanged)

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