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

Trading activity surged for Class III on Wednesday with volume eclipsing the 2,000-contract mark as widespread sell pressure dropped prices as much as 65 cents lower in December, which closed below $20.00. Cheese futures also sustained hefty losses on growing volume as 139 contracts traded in that market versus just 79 the day before. 

It was a slightly higher opening for futures that quickly lost steam before the cash trade and then, amid substantial spot market pressure, collapsed. Weakness in dry whey prices, perhaps inspired by some talk of growing drying capacity, also played a role as those prices largely traded lower. But it was the fact that buyers stepped aside ― as block cheese was offered down 12 cents to $1.99 while barrels plummeted 16.5 cents to finish at $1.9150 ― that was the primary culprit for what appears to be largely “long liquidation” or the closing out bought Class III and cheese futures positions.

Some joked that this was an “Obama break” after President Obama’s reelection victory Tuesday. Although there may be some truth to that for the stock market, which fell 313 points yesterday, we don’t think a second term for Obama played a role in the dairy complex. Chatter in the country ― particularly the Midwest ― over the past few days has centered on a growing availability of barrel cheese. While we don’t hear the same for blocks, sitting at $2.11 for seven days as barrel length grows in the country is not a recipe for buyer worry. Eventually, prices respond to the issues in the country and buyers wait for a price that reinvigorates their action. 

So, the real question becomes not are there block buyers, but at what level do they step back in? Will that number be $1.99 or is it lower still? Given the time of year and what anecdotally amounts to somewhat light inventories held by end-users, we suspect that spot bids come in before ― and perhaps well before ― the $1.90 mark. We expect that absent of any sustained spot market pressure or dry whey futures weakness, the discounts already priced are a little overdone and may provide fodder for a futures bounce into the end of the week.

The job of hedging for producers got a little harder yesterday, but that should not deter from having a game plan. Wednesday is a good reminder that markets take the stairs up and the elevator shaft down. It also serves as lesson that it will likely always be hard to convince yourself protection is valuable when prices are rising.

The grain complex continued its choppy two-sided Wednesday ahead of Friday’s USDA reports.  Corn got a boost early yesterday on word that U.S. ethanol production rose 0.2% last week reaching a seven-week high. Output is down from earlier this year as ethanol producers continue to face low margins.  Still, the news was an impetus for a post-election bounce this morning. U.S. Dollar strength ought to act as a headwind, however, capping gains on corn to some degree.  Still, the grain markets’ resilience Wednesday ought to be noted amid weaker energy and equity markets. Producers looking for coverage are advised to buy call options as volatility and premiums have fallen.

Look for grains to open modestly steady to slightly higher across the board.

Block cheese: $1.99 (down 12 cents)

Barrel cheese $1.91 (down 16.5 cents)

Butter: $1.87 (down 1 cent) 

Grade A NFDM: $1.57 (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., INTL FCStone Inc., 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.