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

Class III was off to the races yesterday after blocks went up 4.75 cents and barrels went up 4.25 cents. We saw Class III settle anywhere from unchanged to +.63 on strong volume with over 2K Class III contracts trading on the day. That being said, the focus yesterday was spot as this move higher was significant and something not seen in nearly a year. The last time the cheese market saw these levels was in November of 2011 with blocks settling at 1.9850 on Nov. 17 and barrels settling at 1.87 on Nov. 21.  

Psychologically, hitting this 1.90 level is significant as both bulls and bears make valid arguments as to the direction this market will take. On one side, we have continued weather concerns and on the other we have potential demand destruction concerns. In any case, we saw October 2012 reaching yet another high of $20.43, a limit up move. This move perhaps proving any skeptics wrong, showing us all that the market does indeed have some legs ― possibly moving further to the upside.

With the Q4 pack settling on contract highs at $20.15, one can expect a bit of follow-through overnight and through tomorrow in anticipation of Friday’s Milk Production report from USDA. As open interest soared on the big rally yesterday, one can see many new positions were being put on and we can even extrapolate the likelihood of great short covering to come on this rally into the 20’s. This is the first time a nearby Class III contract has seen the $20 mark since Sep 2011. However, don’t expect to see the same types of gains we saw on Thursday.

As we talk about $2 cheese, we feel it is important to put it in accurate historical perspective. We have only had a monthly average cheese price with a $2 handle nine times in the past.

Grain markets had a very slow day Thursday with pricing holding less than double-digit gains or losses throughout nearly the entire day session on both corn and soybeans. Volatility is simply coming out in a big way. Wheat led a moderate corn rally as it closed up 15.5 cents on the day at 881.75 with growing concerns over foreign production in Australia and the EU. There was talk on the floor around a newswire article, “Traders pore through the latest FSA Acreage "data dump,” which suggests planted acreage of soy could be at least 1 million acres higher than current USDA August projections; corn could be as much as 500,000 acres higher, according to traders.” That chatter led to a slightly lower bean close, -9.25 at 1625.25, and corn finished up 3.5 cents at 807.5.

We look for corn to open mixed and beans to open 6 to 8 higher.

Daily CME spot market prices:

Block cheese: $1.90 (up 4.75 cents)

Barrel cheese $1.855 (up 4.25 cents)

Butter: $1.79 (up 1.25 cent)  

Grade A NFDM: $1.60 (unchanged)

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