Weekly Update Week 46: Liquidity is key!

Last week was a strange week. We started the week with a firmer sentiment en it looked like the holiday season demand would be dominating the last few weeks of the year. But later in the week, we saw sellers come back to the market causing pressure on prices to come back. It seems liquidity on both the buyer's and the seller's side is thin and thus causing markets to swing. 

It looks like liquidity in the markets (or the lack of it) is causing the market to react very strongly to small changes. A few buyers showing a bit of demand caused the markets to rally last week. The lack of proactive sellers needing to sell volumes appeared to be small causing more liquidity on the demand side compared to the supply side. But at higher prices that demand got filled quite easily, meaning that at higher levels there is more liquidity from the market participant. Later in the week, these sellers (at higher prices) kept looking for more buyers. But the lack of liquidity on the buyer's side now was the problem. It seemed that those in need of product found what they were looking for, but did not need too much.

That said we could conclude that the current market (so the market for November - December) for most products seems better balanced than the market has been reflecting when we look at the price corrections. Especially the cheese market seemed to be in a healthy balance without too many stocks. For the butter market, it seems to be the fact that producers and traders don't want to build any stock that is causing markets to correct down, but those in need of a few fresh loads (or even frozen loads from specific producers for this week loading) are faced with an empty market. The powder market does face more stocks, but historically we think these stocks are still quite small compared to earlier periods. Even when we look at the markets for liquids, we still see that supply and demand are better in balance than some prices might suggest.

But we don't think that the price correction from the last weeks has been wrong. The markets are anticipating the demand in Q1 to drop. The demand in Q1 is normally not very strong and might be even lower due to inflation. Milk production seasonally is stronger than in Q4, and due to high payout prices, higher milk output is also expected. So liquidity on the sales side should grow, and on the demand side, we should see less.  One of our partners expressed his concerns best. He said i can value my stocks and expected production volumes against the current market. But it is my ability to sell those quantities in the market that will determine the value of my stock, not the spot price of the market. And with lower liquidity from the buyer's side, his stocks will be worth much less than just simply multiplying his stock number by the end of the year by the forward market price. Liquidity for him is key!

One of the major liquidity providers on the buyer's side is China, and they have been providing a lot less in the previous months. But some of the COVID restrictions are being lifted, this could cause a bit of a liquidity impuls for the market. Maybe the GDT of Tuesday will shine a better light on this.