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 edged higher yesterday on relatively light volume and a mixed spot cheese market. Commercial buyers are looking at some of the flattest Class III prices in sometime, but are only light buyers at best this time of year. Short-covering, as well as some fresh speculative buying, were  likely the largest buyer on Tuesday as we near the end of the month and the end of the second quarter. Producers are light sellers through the middle of 2011 as they seek to lock up some level of profit.

From a technical perspective, 2010 Class III futures appears to have put in a short-term bottom and looks poised to make a run to the upside. This analysis can be quashed should there be additional pressure in the CME spot market. But given the Class III overnight trade of firming prices, we suspect that the futures will lead the spot market higher — not lower — for the near term.

In fact, we expect cheese to make another run at the 2010 high of $1.5150 in the coming weeks and potentially take that level out this time around. Look for a steady to $0.15 per hundredweight higher opening this morning.

While there doesn't appear to be a drastic tightness in cheese inventories or milk supplies, the same cannot be said for butter stocks. The CME weekly holdings number was shockingly low yesterday. Down 13.9 percent, or 8.9 million pounds, the week ending June 26 showed the largest, single-week drawdown in butter stocks since the beginning of December 2009 and ran approximately 8 million pounds ahead of the 5-year average for the same week. 

Futures markets tend to anticipate the news before we get it, so this weekly storage drawdown may be priced into the market already. But we think that it's another piece of bullish news to rev the engines of butter bulls. Should this be the case, than we feel even more confident that the Class III prices will continue to close the gap on Class IV prices. Look for a mixed opening on butter futures.

The corn market, which is has been down for seven straight sessions, ought to get a reprieve today from a bullish Planted Acreage Report to end the month and the quarter. The USDA said that U.S. farmers planted 87.87 million acres over a million acres short of the 89.22 the trade expected. To add insult to injury for corn market bears (and dairy farmers who need to buy), Quarterly Grain Stocks showed 4.31 billion bushels versus an expected 4.598 billion bushels. 

We try to avoid sounding like a broken record, but it is important to note that price direction and trader sentiment has more to do with the closing bell than the opening on report days like this. But we suspect that the market is due for a corrective bounce that may bring us into the long holiday weekend. Once traders return from their weekend trips to Wisconsin and Michigan and, maybe Iowa, however, they will return with stories of tasseling corn and continued good weather and the downtrend that brought us to new lows this week should continue through July. But strap in for higher prices this morning.

http://www.cmegroup.com/daily_bulletin/Section04_Agricultural_Soft_AltInvestment_Futures_2010124.pdf

6/29  Class III Futures:   Volume:  829  Open Interest (OI) Change:  +340  Total OI:  29,705
6/29  Class III Options:   Est. Put Volume:  101   Total OI:  21,549   Est. Call Volume:  136  Total OI:  20,704
6/29  Spot Markets:   Block Cheese $1.4025 (UP 1/2),  Barrel Cheese $1.3775 (DOWN 1/4),  Butter $1.72 (UNCH),  NFDM: A $1.2400 (DOWN 1),  X $1.2450  (UNCH)
6/29  Other Dairy Futures Volume:   Butter:  32   Dry Whey:  11    NFDM: 10    Class IV:  0   CHEESE:  22

6/29 Individual Cheese Futures Prices, Change, Volume & Open Interest
Jul - $1.423               UNCH                Vol:  0                OI Change:  UNCH
Aug - $1.48        UP .008        Vol:  3                OI Change:  UP 3
Sep -$1.55        UP .015        Vol:  6                OI Change:  DOWN 5
Oct - $1.557              UP .007        Vol:  1                OI Change:  UNCH
Nov -$1.56             UP .02                Vol:  3              OI Change:  UP 3
Dec -$1.545       UNCH                Vol:  0                OI Change:  UNCH

6/29 Individual Class III Futures Prices, Change, Volume & Open Interest
Jun - $13.62       UP 1                Vol:  19                OI Change:  UP 12
Jul - $13.41        UP 3                 Vol:  104                OI Change:  UP 26
Aug - $13.87      UP 21                Vol:  287         OI Change:  UP 53
Sep - $14.60       UP 15                Vol:  107          OI Change:  UP 40
Oct - $14.70       UP 5                Vol:  67                OI Change:  UP 27
Jul-Dec 2010 Avg:  $14.29                      UP 0.12/cwt
Jan-Dec 2011 Avg:  $14.50                   UP 0.02/cwt

Source:  FCStone/Downes-O'Neill