Short Squeeze? Or Fundamental Rally?

January started with a Bang, but February wants to show it might be a shorter month, but not any less exciting! Yesterday we saw what we could feel for the last few days already, a rally towards higher prices. Not across all products, and maybe not as clear as the drop we saw in early January, but we undeniably have a much firmer market sentiment, especially on butter. 

We got quite a few "We told you so" phone calls from producers and counterparts that have been bullish on the market in the previous days. And they are correct, they told us so. The funny thing is we expected the market to correct up, but now we see the correction back up, it feels much more supported than we would have guessed. We see more buyers, and these buyers are more aggressive. At the same time, we see producers who were selling with a reluctancy to do something pull all their offers from the market and offer back at the levels of 2-3 weeks ago.

We also got a few "But Wouter, you told us so" phone calls. These phone calls come from buyers who argue that this "short squeeze" was expected by us and that in two or three weeks the market will come down again and continue its bearish trend. There is no fundamental change in the supply and demand dynamics, and once sentiment settles down, fundamental data should trigger another selloff. Honestly speaking this was our expectation as well, but we arent as convinced at the moment of our analysis as we were a week ago.

Looking at the cheese market, we see sellers react to the bullish trend in butter. Sellers are pulling the offers, and buyers are starting to doubt if they will get cheaper offers in the short term. We do think the cheese market is a bit different compared to the butter market. The cheese market still needs to deal with overproduction v.s. consumption, where butter is a product that could be stored and frozen for later in the year. On butter we see big premiums for Q3 and Q4 compared to the spot market making cash and carry strategies interesting again, if you can bring up the cash.

Also, the market for liquids shows some firmness, although we do hear a wide range of prices. Raw milk found its way back over 30ct and is trading even as high as 35ct. SMC found its way back up to € 1800,- although some claimed to be buying much lower. Cream prices continued to trade higher, and we see prices around € 4650 fca basis in western Europe in eastern Europe around € 4550.

Yesterday evening the FED also increased the interest rates with another 25 basepoints pushing the euro/dollar fx rate to 1.10. We expect a further correction toward 1.15 in the next month. Only due to fx increase the European commodities have lost 15 % in value in US dollars.