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

The declines on Class III continued Tuesday with intraday volatility leading to very strong volume coming as a result of a lot of fundamental news — Monday’s milk production report, the GDT results and the spot session all played big roles.  

Prices took a hit as both the block and barrel markets were being offered lower, but were able to bounce a bit when strong buying from 4 different spot participants stopped the barrel slide at 1.65. Though no blocks were traded on the day, deferred cheese contracts were able to find some form of support from the spot session to limit their losses.

2012 prices were mixed with front months softer and deferred contracts stronger from -8 to +10 and volume was very strong with at least 49 contracts traded in each month. Technically, the trend has flipped and, as we see it, dairy is a strong trend following market. And while we feel the fundamentals of supply and demand may point to further downside, we do suspect that declines will be limited as the spot market becomes choppy in the next few weeks. Demand will have to step up at some point; strong commercial interest in protecting budget levels for 2012 and strong grain prices will likely all lend some support to at least slow further declines. 

Corn: After we saw sharply lower overnight trade on Sunday night, Monday’s close was a disappointment for the bears. And yesterday, after a sharply higher overnight session, the close was a disappointment for the bulls. Outside markets were mostly supportive and combined with talk of Chinese buying, weaker crop condition ratings and what appeared to be a technical turnaround to the upside yesterday, corn just couldn’t sustain the gains as harvest yield reports continue to roll in.

We saw some 15 to 20 e-mails from our consultants throughout the Corn Belt yesterday and, by-and-large, things were on par with last year. Some areas came in slightly below others slightly above, but on the average we would say things were in line with year ago and last year’s ~153 yield is well above the September USDA estimate of 148.1. That being said, an informal survey from the trading floor came out at an average estimate of 147.4 — actually below USDA. While it is still a long way off, the October USDA report already seems to be having an impact on pricing as all are seemingly on edge regarding final production and demand at these higher price levels. We expect price movements to continue to be sporadic, but ultimately believe that ahead of the September 30 Grain Stocks Report the balance point lies somewhere between $6.75 and the $7.00 mark.  Look for that range to be mostly respected unless some major fresh news breaks ahead of the report.

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

Daily CME spot market prices:

Block cheese: $1.72 (down 2 cents)

Barrel cheese: $1.65 (down 2.75 cents)

Butter: $1.845 (down 3 cents)  

Grade A NFDM: $1.490 (unchanged)

These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Commodity trading is risky and FCStone Group, Inc., International Assets Holding Corporation, and their affiliates assume no liability for the use of any information contained herein. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties.