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

The Class III market finished mixed after a rather sluggish 760 contracts exchanged hands Thursday. Nearby months moved reluctantly higher as trading in the spot block cheese market resumed at the $2.10 level, while the more deferred months of Q2 2013 and beyond finished lower on the day. Dry whey futures also underpinned nearby Class III prices, as October to February finished between unchanged and 3.00 higher. The Central Mostly Dry Whey powder price was up 1.25 cents at 59.75 cents, while the Western Mostly price was up 0.62 cents at 61.25 cents.

Perhaps the most surprising feature from yesterday is that Class III finished mixed at all during a sharply higher rally in corn and soy markets that ordinarily would have supported deferred contracts. Is it just a delayed response? Or are we just ignoring them in the face of what has been an otherwise quiet news week for the main driver: dairy product demand?  Whatever the reason, there is a healthy dose of skepticism permeating the cheese and Class III markets this week. Even if we shelve the argument that such a disparity between U.S. and international prices is unsustainable, at a $2.00+ cheese market demand is on shaky ground once holiday orders are filled. It is then the ripe uncertainty that leads to such a lethargic trade.

But demand is only half the story. While we hear milk receipts are generally higher in many of the country’s milk sheds (including out West) from the heat-stricken days of July and August, it’s up only slightly. $2.00 cheese and $20.00 milk, which normally drives dairy producers to milk every last drop out of every last cow, just doesn’t seem to be having quite the same impact this year. Dairy cow slaughter under federal inspection was up 9.3 percent, at 64,500 head, compared with the same period the previous year. Year-to-date slaughter levels are 5.9 percent higher than 2011 levels, with 2,288,100 head slaughtered. 

In Region 9, which encompasses the power-house milk production states of California and Arizona, the slaughter rate hit 19,600 head for the week ending Sept. 29. The last time the folks in that region culled more was back during the first week of April, when the spot cheese market was trading around $1.48.

The grain complex shot higher this morning after what was a slightly bullish report for corn.  U.S. corn production at 10.7 billion bushels was down 21 m/bu. from the USDA September forecast and down 1.652 billion bushels from 2011. The USDA estimate represents the lowest production in the United States since 2006, BUT the corn crop was a little over 100 million larger than trade estimates. Corn export demand was cut by 100 mm/bu. while the feed and ethanol demand were left unchanged. Ending stocks fell to 619 million bushels, 114 million below last month’s estimate. World coarse grain stocks were cut by 6.62 million tons.

Having priced in much potential report bearishness, Soybeans joined in the rally. Soybean production was forecast at 2.86 billion bushels, up 9 percent from September but down 8 percent from last year. Export demand was increased by 210 mm/bu. which along with crushing demand increasing by 40 mm/bu., ate away at almost all the increased production found this month. Ending stocks, however, were raised 15 million bushels to 130 million bushels. World soybean stocks were increased by 4.56 million tons as large crops are expected out of South America.

We don’t expect that the number received yesterday warrant a move to new highs for corn or soy, but rather yesterday’s movement seems to solidify a range bound trade with movement toward the upper end of the trading range ~$7.75 for corn and ~$15.75 for beans and, in some ways, though the report was slightly bullish the argument can certainly be made that it should remove the potential for an explosive upside move in grains, particularly soybeans, for the time being. Focus will turn toward South American weather for the coming weeks which is the one factor that could trigger a sizable rally.

We look for corn to open 3 to 6 cents lower and for beans to open 12 to 16 lower.

Block cheese: $2.10 (unchanged)

Barrel cheese $2.06 (unchanged)

Butter: $1.92 (down 1 cent) 

Grade A NFDM: $1.63 (down 3 cents)

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.