Sales v.s. Supply and Demand v.s. Consumption

Up only! That seemed to be the theme of last week. Because Up Only was the direction all dairy commodities traded the previous week. But the strangest thing for us was the lack of a clear signal or clear event that triggered the bullish sentiment. The GDT might have been firm, but not for every product, we didn't see any large buyers in the market and there was no clear market report about lower production, increased consumption or lower-than-expected stocks.

Still, the market traded up a lot. Last week on Monday we offered butter at € 4350 average price, last Friday the price was closer to € 4950, so up € 600!. The cheese market also saw an increase, although we didn't trade a lot of volumes to confirm the actual market price. But the difference in the bid for Gouda Q2 last week (€ 2925) and last Friday (€ 3200) is also a difference of € 300,-. But if we would need to offer the product for that period we think we should add another € 200-300,-. Looking at the SMP market we see an increase in prices of more than € 350,-. Powders traded lower on Tuesday after the GDT showed a "boring" result, but last Friday the market lit up and we saw prices shoot up. In the week before last week we traded SMP medium heat at € 2350, and last Tuesday € 2585 and for the same product. On Friday the best offer for the same product was € 2800,-. With an increase of € 450,- per mt the SMP market showed its biggest increase percentage-wise.

Does the biggest question remain what is the driver behind the rallies? Butter and SMP both showed significant moves up but without a clear shift in supply or consumption. And looking at the demand for cheese, compared to the offers, we are expecting a strong cheese rally as well. We have spoken about this a lot on Friday and the disbalance doesn't seem to exist in supply v.s. demand but in the timing on the sellers' and the buyers' side.

Supply v.s. Offers

Logically these two should be the same. The amount of product produced should be the same as the amount a producer needs to sell. But there is a difference in timing. A product isn't necessarily sold at the moment it is produced. The timing of the sales is determined by the sales departments. Different coops have different strategies, but most forecast their production and sell forward. We see the polish co-ops working with a different strategy compared to the germans and the Irish for example. The Polish market is usually much more a direct reflection of supply v.s demand. Whereas the Irish and the German markets are more a reflection of the balance between offers and demand.

At the start of this year, it seemed a lot of coops still needed to sell a lot of quantities and they all came to the market at the same time. They had been in denial of the quickly declining market for too long, so stock and sales pressure peaked at the beginning of the year. It seemed most end users weren't ready yet to start buying so there was a big imbalance between offers and demand. The production of fresh dairy products in the first weeks of January wasn't greater than it was in the previous weeks (if anything it was lower), but the sales pressure from the dairies was a lot bigger. It was the increased sales pressure that took the market down 20% compared to the month before, not a sudden increase in production.

Demand v.s. Consumption

The other end of this market is the market for demand and consumption. In theory, there should be roughly an equal amount of demand as there is consumption. But as we have noticed in the piece above, there can be a difference in timing. This year it seemed that most buyers entered the year with sufficient stock to last the first weeks, but needed to come to the market at the end of January / beginning of February causing a bit of an imbalance between offers and demand.

What happened next was no change in supply or consumption, but a change in demand and supply. With a sudden change in price movement more strategic buyers and bigger end users seemed to have come up with the same strategy, start buying! But this sudden interest activated the same strategic answer from most producers; stop selling! With increased pressure from the demand side and decreased pressure from the sales side, the market squeezed itself back up 15% (or maybe even 20%). We asked around all that we spoke to the same fundamental questions:

1. Does the consumption seem to be increasing again
2. Does the supply seem to be decreasing again

The answer to both questions was the same from all partners that we spoke to, no! Consumption has been decreasing a bit over the last months although most admit it isn't as horrible as some paint the picture. The same is for supply as we wrote in our article on Friday, its up, but not everywhere as much as some say.

Fundament v.s. Sentiment

We speak about this a lot in our updates, Fundament v.s. Sentiment. We are a strong believer in the following truth "Sentiment determines the price in the short term, fundament in the long term,". If you want to know the fundament you need to study consumption and milk production. The difficult thing about this is that this data normally becomes available 2-3 months after you would have liked to know it. One of our partners explained that perfectly. He said "It's hard to look back with a broken back-view mirror."

And if you want to know the sentiment you need to just count the number of offers v.s. the number of bids/demand. The one with the biggest number will set the tone of the sentiment. We think the last two weeks were a clear example of more active buyers than active sellers, but fundamentally we are still in the same market as the previous 4 months. We might continue to see a strong rally this week as long as the buyers keep looking for products. But after long and hard thinking, we still don't believe that this market can fundamentally continue to trade as high as it has been doing the last weeks.

We want to close with a small funny GIF that we got from one of our long-term partners. Because even if the fundament isn't explaining the market we see in front of us, it is dangerous to act as if the market is wrong. The lesson? Never ignore the bull in front of you ;)