Weekly Update: Make it, Or Break it (again)

The sentiment in the dairy market has turned undeniably bullish in the last week. Cheese, SMP and butter prices are increasing, and we see some actual trades on higher levels. Those thinking that higher offers cannot attract more buyers have been mistaken. Calling it panic might not be a good word for what we saw last week, but we did see buyers who have been expecting higher prices grab the last offers from the market in fear of a further increase. This week might become a defining week for the months to follow. If the market continues to its rally we might be in for a tight and expensive Q4. But what if the rally doesn't continue?

Let us be honest. We have seen a rally like this several times in the previous months. Cheese in May shot up € 400 per mt in a week time, only to trade back to the starting price in the weeks that followed. Butter prices rallied in February, April and May several times toward € 5000,- prices only to come down again. And SMP prices have been overvalued a quarter ahead for 18 months already. But those rallies all appeared in months where milk production was up (YoY and MoM) and stocks kept rising. But it is the first time since summer that we are seeing milk intake flat YoY and down MoM. Therefore the EU is now tapping into its reserves (as it does every year) and relief from more milk or pressure from stock is very unlikely. So what do we watch for this week?

Spot prices for liquids:

Spot prices have been rising for a few weeks now, but some claim the rally is or should be over. Some of our fixes partners did acknowledge that a bit more and a bit cheaper cream was available at the end of last week and expectations for the coming weeks are stable to slightly lower. Demand for raw milk on the other hand still felt strong during the week. If prices for SMC and Cream continue to trade at the high end of last week's prices we think it could cause the remaining buyers to get headaches.

StoneX Sentiment

This week StoneX host its September event, gathering the most active partners who participate in the EEX to hedge their Whey, Butter and SMP. We have seen the market for futures become more and more important and more and more impact on physical prices. A bullish sentiment among the 100 most active participants in EEX dairy hedging should have an impact on what is happening on the physical side of the market. We are participating, putting the thermometer in the group to have a glimpse of what could come.

GDT Pulse

The GDT Pulse will be a pre-StoneX benchmark of what the sentiment on the world stage looks like. A bullish continuation of the prices might activate the buyers who are sleeping with one eye open. As we have seen among EU buyers, a stronger-than-expected price movement can trigger demand that wasn't there in the first place.

What Else?

Although it might look like we have hit the lowest point in the market, we are still seeing some signals that could also cause the market to break back down again. The hot weather is making place for perfect weather conditions that should stimulate grass growth and might recover the milk volumes lost in the previous week due to the heat very fast.

Looking at the US and EU we see that more increases in interest rates are expected, making money more expensive. We expect to see those results at the end of the year. With high interest rates, it will become less attractive to keep stock, and more attractive to start the year with a better cash balance. This might put pressure on sales at the end of the year.

And in Poland the central bank has decreased the interest rate, causing the Zloty to lose significant strength. Poland is usually a source of cheap products, but due to the strong Zloty, it seemed the country imported more than it exported (to west EU). If the zloty loses more strength, we might see some cheaper products back on the market. Butter that cost Zlt 22,0 last week cost € 4,94 at the beginning of the week and now the same Zlt 22,0 "only" costs € 4,76.

Last but not least economic headwinds start to blow more heavily. In the US default rates on credit card payments are at the highest point ever. More money has been taken of the banks in the last years than the last three crises combined and this all while unemployment rates are at a record low. If unemployment rises it is expected default rates on credit cards will increase even further, putting a big question mark on the strength of US consumption (and with that the rest of the world).

Another bullish week amidst all this bearish risk can be a big confidence booster for dairy commodity sellers, we, therefore, think that this week can give a big boost to the bulls. A negative Pulse, combined with lower liquid prices and a bearish sentiment in Dublin should bring commodity prices back again to the level we have been seeing a floor