Weekly Update: Looking for Firmness

Last week was a week that most producers would like to forget quickly. Commodity prices keep falling to lower levels and so far it doesn't feel that we have reached the floor. The summer silence came early from the buyer's side, while at the same time, producers were still hoping to see some pre-summer activity. With more sellers and fewer buyers in the market, most commodity prices traded south, but some producers remain relaxed. They think the pressure will be short-lived and prices can trade up quickly. But are there any indications of a firmer market?

We think most of the bearish arguments are known and we will not discuss them extensively. But to summarize, we still see that milk production so far has been ok, payout prices remain above the cost-price of milk, big end-users have covered forward a lot of volumes, stocks for butter and smp are higher than in previous years, export demand is low, retail sales are down and internal EU demand in some sectors is low as well. We see end users selling stock or delaying new deliveries, all indications that the market is oversupplied. But those relaxed producers, do they have a  point staying relaxed?

Milk supply is flattening out

It seems year on year milk supply isn't growing as much anymore as in the previous months. It is since mid-last year that milk production started to increase fast (after it slowed down in 2021/2022) but it remains questionable if year-on-year demand will keep increasing. We think it will flatten out at the end of the year. But probably we won't see much more milk in H2 than we did last year. With a flattening trend at least we could see a change in sentiment in regards to milk production. 

Spot milk and liquids are still in demand

Even with low demand for commodities, the demand for raw milk remains ok and the free market volumes aren't easy to find. SMC prices aren't as much under pressure as SMC and although cream prices are under pressure, they aren't collapsing even though demand for butter is weak. We think it is the strong demand from the south of the EU that is now keeping the prices firm. We wouldn't be surprised to see that demand fade towards the end of July. On cream, we hear that in France some of the butter producers are selling cream, which is quite strange looking at their butter quotation. If producers are still selling new butter contracts at € 4780,- we would advise them not to sell cream for around € 5000. On the liquid side we arent that convinced yet that there is much to feel bullish about. 

Export demand

On the lower price levels, we should see export demand and some producers claim to be selling good volumes. We think this is the strongest argument for a recovery of the market. But looking at the SMP market for example we see that the US is coming down just as quickly as we are. If these lower levels don't boost demand then it seems that we are in a race to the bottom with the US for powders. For butter, this seems to be a different case. On levels between € 4000 and € 4300,- we feel the EU could get rid of some volumes of butter. But if export demand can be sufficient to relieve the stock pressure remains to be seen. On cheese, it seems prices have to ease a bit more to attract export demand, at the current levels we expect to see less cheese export than we did in the first 6 months of this year. We don't think export will provide a more bullish scenario for the market, but it might act as a floor for some products. 

China!

We can't make an update where we look for bullish indications without mentioning China, and for a good reason, it has been the driving force on the export market for the last few years. We don't do enough business in Asia to say this with 100% confidence, but we would expect the Chinese to start buying again somewhere after the summer. Especially for their purchases for 2024, we might see an uplift in demand as import quotas are set to zero. If the Chinese come back we might see the backwardation in the GDT go to a contango quite quickly. But if it will impact the EU export possibilities? We don't think it will, but it might change the sentiment among EU buyers who might step back in to the market. 

We think that the producers that are still relaxed might be facing a more difficult summer than they might realise. All bullish factors are "maybe's" and the effect will be seen more in Q4/Q1. But all bearish indicators are problems the market is facing today. We think these problems will have more impact than most want to admit. Last week we saw that for SMP and Butter, there is simply no demand left for July and August and even Q4 buyers already indicate that most of their demand is closed. It feels like the market has to bite trough a really sour apple first before we can start thinking about higher prices again.