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

Class III opened under selling pressure Wednesday morning, following heavy overnight trading that pushed prices to as much as 37 cents lower (Sept). Volume continued to grow at a steady pace into the spot market, which saw more of the same back-and-forth activity that we’ve become accustomed to. The price of blocks fell to $2.3150 and was bid back up to unchanged ($2.1500) on five trades, alleviating the selling pressure on 2011 contracts. Futures finished mixed under moderately heavy volume of 1,768 contracts.

Sellers recently have been a mixture of speculators looking to exit long positions and producers looking to initiate new hedges (short positions). Commercial buy interest, and to a somewhat lesser extent export buy interest, remains a key source of bids in the market through 2012 as buyers see value with every price drop. While the trend has not turned lower, we remain cautious. With the prices weakness showing in Fonterra’s Global Dairy Trade Platform, plenty of blocks coming to Chicago, Oceania milk production kicking up, and retail and foodservice price increases finally starting to dribble into play, our expectations are for the recent weather rally to cool in the coming weeks.

The 2012 Class III average continues to flirt with $17.00/cwt. The most disconcerting problem with an otherwise very agreeable $17.00 average for dairy producers is that it may not actually be enough to turn a profit depending on how feed prices shake out. The one caveat to not selling what has historically been an excellent price for any year is that it is eerily reminiscent of the 2008 producer dilemma in which 2009 $18 and $19 milk was “not enough”. We’re not calling for another 2009, but we are starting to like what we see for producers next year. Call us to discuss 2012.

Cheese futures took a breathier yesterday, trading just 2 contracts and finishing mostly unchanged.  Good volume figures still seem to come mostly on up days lately. Part of this has to do with the fact that cheese has been in a bullish weather market and part of it has to do with commercial buyer comfort levels in cheese futures. Dairy producer activity is still largely reserved for the Class III (and to some extent Class IV markets). As that piece changes, volume will shoot up like Iowa corn this year.

In the corn market, after finishing limit up Tuesday, prices could barely keep their head above water Wednesday even amid a weaker U.S. dollar. The weather and ratings and yield losses and problems appear to have been priced in — for now. And when more stories of problems didn’t pile on today, traders stopped to give some thought to how demand will fare at $7.00/bu. Also, they got another salty taste for the general economy.

We’re still in a weather market and we expect to see that choppy type trade unfold here well through all the pre-USDA report estimates and into the actual report next Thursday. Until we have enough to push through prior highs in December, we are simply re-testing that level. Besides weather we only have two things to trade, private analyst estimates (FCStone was Tuesday and Informa is this morning) and outside markets. Informa yield estimates expected in the low 150’s, USDA at 158.7. The U.S. dollar is higher on intervention and U.S. equities struggling off late to say the least with the Dow down 8% in 9 trading sessions.

Weather models show only modest rain events for the Corn Belt over the near-term, but the outlook for August does show a normal amount of rain and another a threat of more heat in week 3 of August at this point.

We look for corn to open 7 to 10 cents lower and soybeans to open 9 to 11 lower.

Daily CME spot market prices:

Block cheese: $2.15 (unchanged)

Barrel cheese: $2.13 (unchanged)

Butter: $2.1025 (unchanged)  

Grade A NFDM: $1.51 (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., International Assets Holding Corporation, 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.