The Daily Dairy Digest: 19th of October

Yesterday we arrived back home from a 3-day Paris trip. We love the french countryside, we enjoy the French food, we are happy with our French customers and we are delighted that we don't have to be back at SIAL for at least 24 months. But we won't complain too much about the organization, traffic, RER, expensive taxis and unfriendly... you get the point! But being at the SIAL has been a good opportunity to connect with everyone and get a sense of what we can expect in the weeks to come. 

We had already left the SIAL floor when the GDT results came in, but we are still present when the first rounds came through and looked very bearish. We heard someone say that "GDT is puking itself" which we think was a good description. With an average down of 4.6%, it confirmed the negative sentiment of the previous days. Powders lead the plunge down with SMP dropping almost 7% to $ 3250 levels. Fats also lost more ground but performed relatively well. But Butter now is at its lowest point since August 2021.

Before the result came out we already saw that offers for commodities came down. Butter and SMP both traded significantly lower during the auction and cheese offers came in lower as well at the end of the day. The fear that the export markets are as bearish as the EU market seems to be confirmed and producers will now have to start making difficult choices. With a high payout price for milk and high costs, they have to make a U-turn in pricing strategy or risk being left with an awful lot of products at the end of the year. And this is where we think the key driver for the next three months will come from....

FINANCING COST: THE POWER OF THE FINANCIAL CONTROLLER
Where sales departments have been the leader of companies for many years it has been the logistic team during COVID that started to participate in the decision-making process. But in recent months we hear that the financial departments are getting more involved as well. Financing costs are rising, credit insurance companies cut their coverage for some of the dairy (processing) sectors and at the current market prices that are roughly 70% higher compared to last year business as usual is getting harder and harder.

Speaking to an experienced trader, we heard that one of his most loyal customers who he used to sell 6 containers a month, he can now only sell 1 container on credit. A relationship of more than 20 years isn't sufficient for the company (and the banks) to supply the buyer with his needs for 6 trucks. Financial controllers over the next weeks will tighten their grip on the companies they work for in the months to come. Stocks need to be devalued so they will push their sales department to keep as little as possible. Liquidity of cash at some companies will win it from liquidity in trades.