Dubai Update

Yesterday was our first day at the Gulfood in Dubai. We got the chance to meet a lot of our partners face-to-face, and speak to a lot of new partners as well. The halls are buzzing with people and we feel this year's event is much better visited than earlier editions. And although we talked with a lot of people, we haven't been able to find anyone who has a strong opinion about the direction of the dairy market. But what did we hear?

Nobody really has a strong opinion about the market, but there are a lot of similarities in the stories we hear. If we have to put the sentiment in one sentence it should be: "The market wasn't as tight as we thought it was, but it probably won't be as flooded as we think it will be."

1. Milk production

Looking at milk production it seems that Europe had a 1.1% increase in milk production in December. We think it is safe to say that most expect that this trendline up will continue to be there for at least the first 5-6 months of this year. Most seem to think that farmers have prepared for the season and that most feed and fertilizer are already bought. So no matter the milk price, production output is already been set for a majority of the farmers. And with the current milk price it is safe to assume most will target strong milk production.

But most also seem to be concerned about milk in the second part of the year (and 2024 season). Because without a milk price above 50ct (and we won't keep that with the current commodity prices), we will be losing farmers and milk in the second part of this year. And the drop in milk production might be a lot bigger compared to the current increase. One of our more analytic partners thinks the difference in milk production in the second half of this year will be bigger than the current increase we are seeing, bringing EU milk production at a negative growth at the end of 2023.

Speaking about the current increase, it seems Ireland is going to be on a slow start this year. So far the Irish are reporting 2-3% less milk in the first weeks of this year, and this delay in milk production will push their peak a bit back as well. Some Irish Co-ops are more negative than others about this milk season. Where we would be expecting the Irish to show a plus of 4-5% this year some seem to indicate that this year will be between -1% and +1%.

We wrote about it before, but it seems that milk production will be good this year, but to expect more than 1.5% milk this year in Europe seems a bit too heavy. With France and southern Europe in decline, the growth in the Netherlands, Germany and Poland will compensate, but not by an awful lot.

2. Consumption

The general consensus seems to be that dairy consumption in the EU isn't hit as hard as we might have thought at the beginning of this year. There does seem to be a shift between product groups and where people eat, but they do continue to eat dairy.

On arrival in Dubai, there was a report on CNN about food inflation and how it impacted demand. Mcdonald's, Burger King, Wendy, Pizza hut and other fast food companies reported increased sales over the last period. A pizza slice (with cheese on it) is much less expensive than broccoli. And a cheeseburger is cheaper than a cauliflower. And those who eat out less and take their lunch from or at home might also not be diverting from dairy. The cheese sandwich is still in the top three of favourite sandwiches.

So the general consensus seems to be that EU (and US) consumption isn't that bad. What does seem to be bad is the demand from southeast Asia, China and Africa. These countries seem to be impacted hardest by food inflation and stocks are keeping them from buying more. Products like fat filled are really slow on sales without any signals that demand will be back soon. Some countries do however seem to come to the market when prices drop, so there is a natural floor in the market. But most countries have sufficient stock to step back from the market once prices increase.

The general consensus among our Dubai partners we spoke to seems to be that consumption is a big question mark, but the first signals seem to indicate that demand isn't as much down as some (and we as well) forecasted. The biggest factor that might pull the market up / down seems to be export demand.

3. GDT impact

With export demand being one of the key indicators for this market, most of our partners are taking a close look to today's GDT. The first indication seems to be that we will see a slightly firmer outcome and that might pull the market a bit in motion. But any result below a 2% increase will have little to no effect we think. If the GDT will surprise us with a 2% decline or more, we think the market might show its bearish side again. For those who want a direction in this market we suggest to wait for the GDT outcome.

4. Small positions

But what is most telling about the market in our opinion is the small "positions" the partners we work with seem to have. Most producers we speak to have sold forward a little bit, but we think a of sales still needs to be done. As one producer told us, they needed to unload a bit of production when prices went down as rapidly as they did in the first weeks of the year. But as they were sceptical about the decline, they didn't sell more than absolutely necessary. It seems most producers have sold their February and March volumes, but they have been very slow with their Q2 sales. We expect producers to be back in March for their Q2 sales.

End users seem to have done the complete opposite. Especially buyers for cheese are still on a "hand-to-mouth" strategy it seems. Purchases for February are mainly done, but Q2 needs are mostly not covered. It does seem that forward purchases for butter are bigger than forward purchases for cheese and smp. It seems that most butter buyers have experienced 3 times in the past 5 years that butter prices can rise towards € 6000/€7000 per mt and they have been happy to cover volumes between € 4500 / € 5500 in the past 7 weeks for the full year. But cheese buyers haven't seen cheese prices over € 3500,- ever, only in the last 12 months. They seemed to be much more reluctant to accept these higher prices again.

Traders we speak to also seem to be uncertain about their market outlook, so they also seem to have small positions. Some traders are more outspoken than others. Among traders, it does seem that if they need to make a prediction, most seem to expect a more bearish market short term, and a  more bullish market 2nd part of the year. But we had one trader allowing us to quote him saying: "Selling short on the current levels makes little sense, as the downward potential is relatively small. Selling short in such a volatile market is very risky as we have seen that once market turn bullish, prices rally about € 500,- or even more."

5. Our first conclusion

Walking around and speaking to so many different companies we think that for the first time in months, the market has found a consensus on the market, and that is that most don't know what to expect. It seems we all expect a much firmer H2 of 2023, and 2024 might bring us back to the price levels of 2022. But we need first to get trough 2023, which is mainly covered with question marks for now.

With traders keeping small positions, producers selling only what needs to be sold, and buyers buying hand to mouth, the market might get very volatile, as any disruption in the general consensus can push the market hard in a direction. Risk management is going to be important it seems.

But if we can get through this market without any big disruptive events we might get into calmer waters and settle down on prices as we have seen in the last week. It might be that we see production trading rangebound as follows

Butter: € 4500-€5000
Gouda: € 2900-€3500
Mozzarella: € 2750-€3000
SMP: € 2400-2700

As we are walking the Gulfood halls we haven't gotten the time to see where our partners are with their current bids and offers. If you have any needs, please send me a whatsapp to discuss possibilities.