A Stable Outlook

We are back after a three-week absence from the market. We have come back to a market that looks very similar to the market that we left. Reading back to our last update from the 20th of April we see roughly the same prices and the same market conditions and prices. And after speaking to most of our partners, it seems the views of many are still the same:

1. Supply: Problem or not?

Milk supply is still strong in Europe, although some regions have underperformed a bit v.s. expectations. But EU milk supply is up v.s. last year for sure. But where some (and we) expected the higher milk volumes to cause pressure on commodity prices, it seems te market has found a way to deal with these extra volumes quite well. We did see some pressure in the lead up to the peak, but the market has absorbed all volumes quite easily. We do see that spot milk is still plenty available (and cheap). But the question is how long these volumes can stay around with the EU milk peak behind us. But looking at the recent price announcement from EU coops, we are also a bit more positive about milk production in H2 of this year. If the market can hold on to the current commodity prices, we think the payout price to farmers should not drop much further. Asking around most farmers are still making a good profit at the current milk price. Lower feed, fertilizer and energy costs have reduced the on-farm cost significantly, therefore a continuation of the strong milk supply remains our forecast.

2. Demand: Strong, or not?

As said, the strong supply didn't cause the EU commodity market to break down. This feeds the idea of many that the demand side from the market is much stronger than anticipated. We remain a bit sceptical on this point. Much lower prices for fresh cream, SMC and raw milk are proving that demand isn't that great and that producers rather sell liquids than produce commodities. But looking at the cheese market, we would have expected to see a similar pattern. Fresh mozzarella, Edam and Gouda arent easily stocked, but we haven't seen much-aged products. Looking at the butter we still believe a lot of product is being stocked for future sales. The premiums paid by the market for Q3+Q4 give a strong incentive to producers, traders and end users to buy the "cheap" product from the spot market and store it for use/sales in Q3/4.

3. Exports: Up, or not?

Export demand seems ok, the last two GDT events were bullish and indicated higher demand. The futures for today's event are also indicating a continuation of the up trend. It does however seem that these stronger GDT results have been pushed by a small group of buyers, creating some doubt with our partners about the sustainability of this demand. The last tenders from Algeria didn't show a very firm market. Volumes were lower than some expected, and prices were much lower than the future market indicated. It seems EU suppliers were happy to supply the world market on spot market prices for future periods.

4. Economic outlook: Better or not?

The economic outlook has also been a big question mark. With high inflation and high interest rates a economic recession is/was expected. Food inflation in some countries has peaked at 20% but is on its way down in most countries now. Still, food prices are much inflated compared to last year, but the increase rate is slowing down. Retail figures suggest lower purchases, but these can not be found back in the number of the food service sector. And as said, demand is seemingly quite strong. The experts we are following remain very divided. Some still expect an economic recession worse than the one of 2008, but others see lights on the horizon, claiming economies might continue their growth trend. We expect the economic collapse to stay out for at least a few more months. We were trying to find a nice holiday officer, but it seems most popular destinations are already fully booked! So where is the crisis?

Conclusion? For some traders (and us as a broker) this might be bad news. But we think the market, for now has found a good balance between supply and demand. It seems the volatility has calmed down a bit. The higher prices for Q3 and Q4 can be explained by buyers buying certainty, and producers waiting to sell forward. Boosted by the memory of prices of last year, buyers are happy to pay a bit more to buy certainty and producers have no real incentive to sell forward. But looking at the spot market since February, we think the market is in a better balance than we all expected. All prices have traded (on the spot) in a relatively tight range. We all know this balance will not last, but we think we need a significant event on the supply or demand side to create a new motion.