Taking a Break? or Topping Off?

Yesterday was again an intensive day in the EU dairy commodity market. With a very tight market for liquids, sellers kept trying to sell products at higher prices, but they are getting more pushback from ... from other sellers.  Because the current market on some products seems a market from sellers v.s. sellers without finding buyers. Some origins/products seem to be calling of a bit, or at least finding a floor and resting a bit. The question that everyone asks... is this the top? 

One of the first things you learn as a trader is that it is impossible to sell the top and to buy the bottom. And although we know a few traders who think they are able to do this, we know the best traders know that only luck makes them sell the top, or buy the bottom. So asking if today's prices are the highest prices we are going to see is not a question asked by the best traders, they ask if the sentiment is changing. And so far we can't say it is.

Bullish signals keep being added to the mix of information we see in the market. For the EU the euro/dollar exchange rate is beneficial for exports and should give the EU sellers more advantages. The spot market for liquids only seems to be getting tighter and the US CME butter prices have reached a new All-Time-High. In addition, bids from export markets are going up and bids on futures remain strong. One thing that is changing is the amount of sellers. At the current levels, we see there are again producers and traders willing to sell some position/stock/forward contracts. It seems most still carry a bit of stock that they would rather move at these prices than store and hope for more.

On the bearish side, we still have the same argument and we can only add more confirmations to the same arguments. End-user participation in this bullish rally is extremely low. Apart from buyers for some species we hardly see any end users buying. Most of the purchases seem to be coming from traders. This suggests there has been a small short squeeze. To push the market higher we need end users to engage in the rally.

The rally on EEX seems to be more of a problem due to a lack of sellers who are losing confidence in the settlement pricing EEX uses. The French butter quotation is just so out of line with the market that having this in the settlement makes risk managers wonder who to price a future. The French butter quotation has been roughly € 300,- or more above the price of NL and DE quotations for more than 6 months and now is suddenly roughly € 200-€300,- cheaper. Selling (or buying) futures to manage your risk with such an unpredictable quotation is in our view a reason for a lack of liquidity on the sales side.

We think the last part of the market will determine whether we are in an overheated market that is about to cool off again, or if we are just resting only to shoot up higher after one or two weeks of consolidation. In all honesty, we are happy we don't have to pick a side, and we are just as curious about the next move in the market as our partners. So we ask you the same question as our partners are asking us: "Do you think this is the top?"