Weekly Update Week 43: Break or Bounce?

Last week the dairy markets broke down after trading relatively stable for weeks. Although the sentiment has been bearish for while, commodity prices managed to trade relatively firm in the weeks leading up to last week. But last week the negative sentiment on SIAL, combined with more pressure on liquids and a very bearish GDT made the dairy markets break down. Butter lost 5% of its value, SMP also traded about 5% lower and cheese saw an even bigger correction. But on Friday the market felt it had reached a (temporary) bottom. So this week's question is, will we bounce back up? Or will we break the strong support levels in search of lower prices? 

Stong price corrections are usually followed by a trend correction. We see it in almost every commodity, and when prices went up last year around the same time, we did see some slowdowns and corrections as well. And there are good reasons for price movements to slow down or correct. We would not be surprised if this week shows a bit more stability.

Pressure off Producers

One of the effects of last week's move-down was the pressure felt by producers to liquidate some stocks and sell some additional production that had not been forecasted. It seemed that at the end of last week the first segment of sales was done. If producers can now wait to see how the markets react, further pressure might stay out. We did ask our partners if they think this could be the case, but we had some partners that pointed out most producers would only be back from their Paris trip this week so they will translate last week's sentiment into a strategy for this week. The "producer's pressure" in our view is a 50/50 situation. If we will see more pressure we expect to see it starting Tuesday.

Buyers are Back

Buyers have the special skill to hide when sellers come aggressively to the market. Ingenious purchasers know how to time this absence from the market and only come back when they feel a bottom is in. The same we expect for traders that have been anticipating the market to come down. They would want to cover their short positions once they feel the market might not run more bearish in the next days. The disappearance of the sellers and the appearance of the buyers can cause a bounce. But these bounces are usually small and short.

Christmas number Crunching...

Christmas is now two months in front of us, and this usually leads to an additional demand. This year there are a lot of question marks surrounding the Christmas demand. Because this year people might need to make fundamental choices on what they spend their money on this Christmas. Will it be on warmth, food, presents, travels, or just a bit of everything? Asking those who supply retail, it seems retailers are expecting a different buying pattern. We hear that "expensive" products are ordered a lot less compared to last year. Especially now suppliers have to charge 2x the price of last year. But it seems safe to say that we will not break last year's demand.

The second number to crunch is the stock level of those who supply the retailers. We have spend some time last week speaking with several and their stock levels are much bigger than last year. They even are a bit worried by the lower prices we offer, as they see that they still have plenty of unsold stock that hasn't been sold yet. The likeliness that demand will come from their side seems small.

Warm Weather

And last but not least, the warm weather is also putting the supply/demand balance a bit more under pressure. We have been mowing our grass this weekend again, and looking at the weather forecast is will not be the last time. Temperatures here in Holland are expected to be (for the next 7 days) between 19 and 23 degrees. And it is not only the Netherlands that is having extremely well weather. Speaking to an Irish partner last week, he confirmed he could still almost hear his grass grow.

And the good weather is not only helping farmers with their grass growth, but also with their energy balance. Energy prices are coming down fast, and those with a lot of solar panels will have a good return compensating for their energy bill.  European gas and energy prices are nearing the lowest point in 6 months taking away some of the worries that higher energy prices bring.

So Bounce or Break?

So should the market bounce or break? That is up to the market (duh!). But we would expect to see a stable to slightly higher start of the week. But if demand for November and December stays out and milk volumes continue to climb, we would expect the pressure on the supply side to be too heavy to hold the markets firm.