Analysis of the current dairy market

This week is a difficult week for us to make a proper analysis of the dairy market. The trades via our platform are small providing little data for us to analyze the market.  The main driver that has put the market on a small break seems to be the great uncertainty we see on so many factors. We decided to put together some of the parts on paper that we see causing uncertainty and some of the parts that we think will play a role in the dairy market for the months ahead. 

1. MILK SUPPLY 

The number one factor on the market to look at is the milk supply. Without milk, we would have nothing to broker. Germany, France, and Holland are in decline for a few months in a row. The latest numbers from Germany point on a widening gap with the year before showing a 3% deficit on last year. Ireland / Poland and Italy seem to be increasing their milk volumes, but they aren't able to fill the gap made by the three major countries. The same trend is seen worldwide. Fonterra is missing 1.5% milk compared to last year and the US is also slowing down. So far, none of the countries have shown a trend reversal. 

2. COST

The market is faced with increased costs throughout the whole chain. Farmers are faced with higher costs for energy, fertilizer, and feed. These higher-cost look to be the reason why farmers aren't investing in increasing the milk output. Further up the supply chain producers are faced with higher costs for transport, packaging, labor, energy, and storage. So even with a higher commodity price, they are not yet able to translate this back to a better milk price for farmers. End-users are also faced with the same cost increases on the packaging, transport, storage, and financing. 

3. INFLATION / MONEY

The market might not be flooded with milk, but there is plenty of money available. Central banks have pumped almost unlimited amounts of money into the market. And with Oil prices breaking 5-year record prices, milk importing countries don't seem to be short on money as well. And because retail prices haven't gone up yet consumer consumption patterns haven't changed yet. This Inflation in combination with less milk seems to be the two perfect ingredients for a very volatile dairy market. 

4. DEMAND

The start of the year always shows a little decrease in demand for dairy, but in general, we still believe that demand is still growing. From our partners who act a lot on the export markets, we hear that the demand from North Africa, the middle east for cheese and butter remains very well. But also Asia seems to be looking for more cheese, UHT milk, AMF, and cream. The biggest pushback on the demand side seems to come from supermarkets. We hear more and more conflicts between big supermarket chains and producers. But we think the power of the retailers has reached its limit. If the new retail prices will increase between 20% and 60% as they will have to, we think that will impact and that will be seen back in consumption numbers. 

5. GEO/POLITICAL

This one will have a major impact on the market as well, but we can't really predict how. As the world seems to turn the corner on COVID new problems doom on the horizon. Russia is on the border of Ukraine. An invasion might trigger big economic sanctions impacting the energy, wheat and Oil markets. China is threatening to regain control of Taiwan, frustrating relations with the US and EU. And with major ports shutting down in China for 4-5 COVID infections logistic disruptions might also still last for a long time! 

Combine all these factors and we would say we are looking at a market that is faced with a lot of risks. We understand buyers only buy what they need. We understand sellers pushing up their prices, as the higher return on commodities is needed to compensate for additional costs. We understand traders keeping their positions small and stock low as financing stock and speculating in an uncertain market can be costly. 

But if we would add the information we have together we are faced with the following bullish signals:

• Low milk supply (without view on a trend reversal yet)
• Low stocks 
• High production cost (from farm to end product)
• High inflation
• Big buying power from dairy importing countries
• No cheap substitution products (not mentioned in analysis above)

The bearish signals we would identify

• High prices might lead to collapse in demand
• No cash and carry in the market, no insentive to stock product for future deliveries. THis might put pressure on any surplus production. 
• Sentiment can be stronger than fundament in times of low transactions, might causing some big volatile swings.