Relaxed Bulls and Nervous Bears

Last week the market started with some bearish moves, pushing most prices for commodities down. But in the second part of the week prices stabilized or even started to move back up a bit. The supply side for commodities remains tight as producers aren’t willing or aren't able to offer commodities at prices the market is targeting. Most of the offered volumes are sold by traders, and their stocks are shrinking and their short positions seem to be growing again.

Fundamentally we are still bearish on the market as we still believe EU supply is outperforming demand. But the fact that buyers are more nervous compared to sellers gives us the feeling that short-term price action will be still more favourable for producers. At the end of last week, we still noticed more buyers indicating they could accept higher prices, but sellers aren't eager to engage. But there is a side note we must place next to this development.

Buyers are locking in purchases much further ahead compared to where producers are selling their products. It seems traders are therefore buying products for close by to hedge their sales to end users for further out. By doing this they are keeping the market “empty” as most stocks seem to be sold. The effects of this seem to be visible in the warehouses. For SMP and butter stocks are climbing and we hear reports that warehouses already have a lack of space. A worrying signal as the EU milk flush has yet to start.

So we think we are nearing a point where buyers are finished with their forward purchases, but producers will still be needing to sell spot volumes. The lack of storage space, but also the lack of financing will lead to sales pressure. Once this period hits we think we can see commodity prices under pressure again with much bigger downward pressure than we have seen this week. The fact that the spot market for liquids is already showing this dynamic is an indicative signal for us that the commodity market will come to the same point. The only question is when? As we said, for now, the bulls seem comfortable enough to withhold product from the market, and with nervous buyers, they might get some last-time higher sales in their books this week.

For our longer-term price expectations, we keep looking back to prices of 2021, when we had less milk, more exports and higher internal demand. We still believe that now we have stronger milk production, lower export deals and lower internal demand, EU commodity prices should go back to the levels of 2021. And those who are saying the cost price is up, we will tell again our belief that “the cost price of a commodity, doesn't determine the sales price, that is determined by the balance between supply and demand.”

That said we think we will have an exciting week ahead of us again. With GDT on Tuesday and negative reporting about NZ milk production, we think we might see a surprise, again driven by sentiment. We also believe most big buyers who haven’t closed their Q2 purchases yet will have to come to the market this week pushing the balance between buyers and sellers again in the favor of the market bulls.