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

Class III and cheese futures volume has been lackluster this week. Excess milk flow is trading several dollars under the board price, cheese plants are running full, and while we stand corrected on an error from yesterday’s comments by a friend, whom we thank, that CDI has a cap ― it does not ― many co-ops, large and small independent companies, and others are instituting all sorts of programs to stem the tide of milk.

Yet, we are in good balance on the cheese side of the equation. Yesterday’s  action showed a stark difference in put/call trading with put option trading outweighing call option trading nearly 6 to 1. Downside is the widely held expectation, but the market is chopping sideways. 

Perhaps the real test will be when schools let out soon and Class I demand eases seasonally. Perhaps it will be when an increased flow of European milk into cheese vats hits the market. Or maybe if spot prices continue to chop sideways between $1.45 and $1.55 for May, we will have seen the lows as some have suggested. We are thinking spot ought to move lower soon, but if not we can’t be surprised by a steady to higher futures trade. Commercial buyers are still looking for coverage through year’s end, and the longer we hold the more time elapses between now and discussions of summer heat. 

Remember, futures markets are anticipatory in nature. Sometimes markets react to news, but many more times it has news priced in long before we read about it.

In the grain complex, the “trade” began aggressively talking about bearish USDA numbers, but really it was the continued flight to safety and bearish outside markets that finally tipped the scales on corn. We have reports of two European funds that have been liquidating their holdings, which include corn. U.S. dollar strength, the Euro pushing and closing below the key 1.30 level, no ethanol margins, etc., all contributed to corn falling 15 ¾ in July and 11 ¼ in Dec. Until July breaks and closes below 6.00, we won’t look for serious continuation but that could happen here soon.

The USDA handed us a mixed report this morning. Corn called lower, beans higher. Beans may outweigh any negativity early. But old crop corn just got another 50 million bushels. I can’t see how that will be ignored for long.  

Right now, corn is called 5 to 10 cents lower and beans 10 to 20 higher.

Daily CME spot market prices:

Block cheese: $1.4925 (unchanged)

Barrel cheese $1.4525 (unchanged)

Butter: $1.30 (unchanged)  

Grade A NFDM: $1.1225 (down 0.5 cent)

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