Dairy on a Paraglider

Since our last update, the market didn't show much direction. If there is any direction we would say it's down across all products we broker, but there are no major shifts. In the second half of last week the market for liquids stabilized (or firmed even a bit) and sellers didn't want to offer much more product. But the stopped downward trend seems to be finding some traction again. More milk is pushing out more commodities that don't have a buyer yet. We expect the sales of these additional commodities to impact the prices a bit further. The first confirmation we got today. 

The signals are not bright, and the pressure isn't heavy, but it's there. We see butter offers coming down slowly, we see more offers for SMP (and sellers are slowly decreasing the price) and we see more cheese available. A significant drop seems unlikely as we continue to find spot buyers who can profit from slightly lower prices. Also, the positive GDT result of yesterday will form a (temporary) seatbelt to avoid a market crash.

We and our partners are used to markets rallying up or falling down, but currently, it feels like we are on a paraglider sliding down slowly. And a bit of headwind might even lift us a bit higher, only for us to slowly glide further down after the wind lays down. In our view this slow downward trend in the next months is clear, the only question is where we will land. Will we land on a mountaintop nearby, or will we glide down toward the bottom of the valley?

Landing on a lower mountaintop

A lot of our partners seem to think that we will find solid ground quickly again. The previous top during last years H1 markets (butter € 5000, Gouda € 3600 and SMP € 2400) are a solid floor for commodities today. The high inflation has set new market lows in their opinion.. So even if the market would face the same S&D balance as last year, prices could still trade 10-15% higher than these tops.

So far we tend to agree for most of the reasoning with these partners. We see that there is a solid floor and big industrial buyers are expected to step in once prices for commodities long term will fall below the above-mentioned prices. It will take some time for these floors to break. Also, the worldwide S&D for dairy will put a floor under the EU prices. Only looking at yesterday's GDT we see that once prices drop buying interest returns.

Landing in the Valley?

But not all analyses lead to landing on the previous tops. Those who have walked around in the dairy market for more than 3 years have heard multiple times that there are new lows that will be supportive. We remember that after 2016-2017 the butter prices were expected to remain above € 4500 forever. Since then we have seen prices below € 3000 even, but a long time between € 3000 and € 4000 as well.

We keep speaking to partners who look at the S&D balance differently than those a bit more bullish on the market. They claim to be expecting roughly the same amount of milk this year in the EU, but stable to slightly weaker internal EU demand and less export. France is now producing more milk compared to last year, and the negative trend for German milk seems to be reversed as well. We hear more positive signals about the Irish start of the year, so they should report more positive numbers compared to last year as well (some say it can't get worse)

So with a weaker to at best stable S&D compared to 2023 they do not see any reason for dairy prices in H1 2024 to trade above de H1 2024 prices. They expect the market to land back down at prices roughly the same as last year (butter around € 4500,- gouda around € 3400 and SMP around € 2200.

Flying through the valley, back to the top!

Our sympathy goes out to the middle road. We do think that a market faced with more milk will drop to prices closer to last year's prices. But long-term trends will be stronger in the end. And the last years have learned that the market always drops lower than most of the market participants expect, and they rise higher. And with most partners believing in a modest price decline, we should expect a more aggressive correction. But the bargain buyers will stand eagerly at the sidelines to jump back in the market as soon as they feel a fresh breeze of headwind, lifting up our paraglider.