A Healthy Dairy Market Needs Higher Prices

Another uneventful day from our side in the dairy market. Our buyers and sellers don't seem eager to switch strategies; all we have are more expensive offers and lower bids. Listening to the sentiment among our fellow brokers in the market it seems to be a widespread sentiment. It gave us some time to catch up with some people and discuss the market more intensively. 

But even with all the time to catch up, we still can't make sense of the market. Short-term data suggest we need to see lower prices. The biggest complaint we get is that the lack of buying interest from the industry for Q3 is worrying. But against that argument we can see the pressure with sellers is easily lowered with a few sales on lower levels. In addition, we see and hear that on lower levels buying activity from the export markets is attractive again.

Another much-heard argument from those expecting higher prices is that the milk supply isn't as good as some expected it to be, and we agree with them. But the demand from retail and bigger industrial buyers also is weaker than expected. The biggest question is, which is more significant, the lower-than-forecasted milk supply or the lower-than-forecasted demand?

The biggest argument for lower prices (mainly for SMP and butter) is the stocks. And for this, we don't see and hear a strong counter-argument. Warehouses are more than full and some partners cant store more products in their favoured warehouses. And the stock is ageing as well. We see more butter from 2022 production on both SMP and butter. Some will say the goods are already sold, but it means the buyers are covered as well. Usually starting in July more products should be leaving the warehouses than that entered the warehouses. Let's hope this will be the case this year as well, otherwise, stocks will be too heavy to keep prices stable.

We also got the chance to catch up with a few producers, most don't seem to be under pressure to sell, although they admitted that sales have been slowing down for them as well. Most expect demand for Q3 to return still, we doubt it will. The biggest concern for most producers is that the cost of commodities is far above the market sales price. By selling at the prices we have been brokering in recent weeks they would lock in huge losses, impacting their business, but their farmers as well. They seem genuinely worried that low prices might kill supply over a longer period causing prices in the future to surge again to levels of the last years. We join them in their fear. If prices in Q3 drop too low and won't recover in Q4 we expect 2024 to be a very similar year compared to 2021 and 2022 with more extreme effects.

Without being able to broker anything, we do think we got a chance to feel the sentiment a bit better. Most partners in our network would benefit from higher commodity prices, even most of our buyers do not want to see prices fall much lower. It seems most of our buyers also realize the market needs a fair market price to keep volatility within a reasonable range. To hedge themselves against high volatility as seen in 2021 and 2022 we think a lot of buyers already positioned themselves with security stocks, and therefore are done for the next few months. Therefore we think we will hit new lows in the next weeks before we can go look for better prices towards Q4.