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

It was a bullish day yesterday. Spot cheese rebounded after taking a licking the last few sessions, Class III futures and cheese were all up but mostly in the nearby months as traders show increasing reluctance to bring up deferred contracts.

While at the moment there is concern about high prices eating into demand, increased international competition alongside booming New Zealand milk production and strong European cheese production, in the medium term the price break might well prove bullish to the markets. Why? Over $2 cheese, and buyers will buy for their immediate needs but not into the distance and buyers had already aggressively restocked physical inventories into this year’s $2 cheese move. Thus, a price break in an overall bull market saddled with production concerns in the U.S., particularly the West Coast, might very well lead buyers to forward-contract many months out rather than only buying for immediate (think holiday and Super Bowl) needs. If they do buy farther out and supply losses are realized, then we might very well end up very short milk less than six months from now and that is the kind of scenario that could take this market back toward record pricing ― especially since we don’t’ see much if any give in the whey pricing.

In the grain complex, recent price breaks seem to have ignited some demand out there. We don’t see much (if any) room below $7 current crop corn, but we also don’t see a lot of upward potential. Beans are down about 3.50 from their highs. With the USDA dropping wheat exports in last week’s report, the market is playing with corn vs. wheat valuations and estimating some more wheat for feed use later this year. Volatility in the grain markets continues to fall and thus it is a seemingly good time to buy option protection rather than locking up a set price.

Block cheese: $1.91 (up 5.25 cents)

Barrel cheese $1.835 (up 0.75 cent)

Butter: $1.89 (unchanged) 

Grade A NFDM: $1.5725 (down 0.25 cent)

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