Editor’s note: This market commentary is provided by Dave Kurzawski and Eric Meyer, risk-management consultants with FC Stone/Downes-O’Neill, Chicago, Ill.

Class III prices flattened out somewhat last week and the large premiums brought to the Class III market courtesy of strong butter/powder prices over the past month dwindled as those prices softened.  Meanwhile, CME cheese prices edged higher once again Friday leaving block prices at what has become an infamous price level: $1.50.  It is at this level that sellers have proven themselves prominent for there is a healthy dose of psychological resistance in the low-$1.50 block price range so far this year.  Still, it appears we are seeing the result today of cheese trading in the high $1.30's and butter in the low $1.60's of a month ago; it doesn't take long for a few companies or co-ops to shift some milk from the cheese vat to the butter churn.   As such we don't expect a glut of fresh cheese to come to the market nor do we expect a solid decline in CME spot cheese prices this week.  The trade, however, is more timid at current prices and largely expecting of cheese sales to press CME spot prices lower.  Look for a mixed open this morning, but firming prices for the week.

The USDA Cold Storage Report released Friday afternoon appeared to be more neutral than anything else.  American cheese inventories rose 5.8 percent over 2009 against our pre-report expectations of 6 percent.  Total cheese stocks rose 8.1 percent over 2009 versus 8 percent.  And butter stocks fell 13.5 percent from last year against expectations of a 14 percent decline.  In the calculus of Cold Storage reports, April's numbers are best characterized as a nonevent.

The CME Group launched the new International Skimmed Milk Powder contract with the open of the other dairy complex products last night.  So far interest has been good, but trading has not.   We applaud the creation of this new contract and the price transparency we hope will result from it, but we've been around long enough to know that nearly all contracts have some trouble garnering trades in their infancy.  

Corn prices traded mixed overnight.  Prices are more choppy than anything and until we can make some fresh ground to the downside, opinions are mixed.  There is a lot of growing season - and weather - left to contend with, but the outlook for U.S. corn prices is not a good one.  Not at least for the bulk of 2010 unless something changes.  We still like buying call options above the market to guard against unforeseen changes (especially if you are marketing any milk), but we are - and remain - bearish the price of corn.

The Buenos Aires Grains Exchange reported Argentine soybean harvest at 90 percent complete yesterday, up 7 percent from last week, with the overall yield averaging 45.1 bushels per acre which is a new record. Their crop estimate remains at 54.8 million tons, above the USDA’s 54.0 million tons and near the top end of 52.5-56.0 million tons trade estimates. Corn harvest was reported 78 percent complete, up 4 percent on the week although behind last year by 10 percent. The average corn yield was estimated at 139.9 bushels per acre.

5/21  Class III Futures
:   Volume:  801  Open Interest (OI) Change:  +152  Total OI:  29,819
5/21  Class III Options:
  Est. Put Volume:  283   Total OI:  22,984   Est. Call Volume:  280  Total OI:  22,280
5/21  Spot Markets:
  Block Cheese $1.50 (UP 1 1/4),  Barrel Cheese $1.4775 (UP 1),  Butter $1.58 (DOWN 1/4),  NFDM: A $1.29 (DOWN 1);  X $1.30 (UNCH)
5/21  Other Dairy Futures Volume:  
Butter:  65    Dry Whey:  37    NFDM: 28    Class IV:  23

5/21 Individual Class III Month Prices, Change, Volume & Open Interest
May - $13.30        UP 1                Vol:  16          OI Change:  DOWN 5
Jun - $13.88      UP 5                Vol:  147       OI Change:  UP 29
Jul - $14.10       UP 3                Vol:  266       OI Change:  DOWN 25
Aug - $14.56     UP 2                Vol:  150       OI Change:  UP 48
Sep - $14.85      UP 7                Vol:  62          OI Change:  UP 23
May-Dec Avg:  $14.40                       UP 0.05/cwt
Jul-Dec Avg:  $14.65                         UP 0.05/cwt

Source:  FCStone/Downes-O'Neill