Back with the Bulls

After a six-week summer break, we’re back and ready for action. Returning to the market after some time off, we're ready to reengage with our partners and together reassess the market dynamics. Contrary to our expectations of a slightly firmer market, we find ourselves in the midst of an intensely bullish environment that promises heightened volatility in the weeks and months ahead. Butter prices have surged by over €1,000 per metric ton, and cheese prices are also on the rise. The whey market has gained some bullish momentum as well, with only the SMP market continuing to trend within its long-standing flat range. So after a six weeks absence, we have a lot to say about this dairy market. Let's dive into what we see, read and hear. 

Market prices are always a reflection of the balance between supply and demand, so let's examine what we're seeing and hearing on the ground. We’ll review milk intake, demand trends, and stock levels.

Milk Intake: Under Pressure

We’re currently in the seasonal low period for milk intake. With limited supply and high demand, the spot market for raw milk, SMC, and cream is tight. Cream prices are breaking records, with quotes ranging from €9,000 to €9,250 for the coming weeks. SMC prices have rebounded from their Q2 lows, but they haven’t made significant upward strides, currently hovering around €2,150-€2,200. Spot milk prices are also on the rise, with prices ranging from 50 cents in France to 56 cents in the Benelux region.

The increase in milk prices can not only be attributed to the seasonal declining milk volumes across Western Europe. Looking at the results of the last weeks, we see that in the Netherlands, milk production is down 3-4% year-over-year, and Germany is trailing by 1-2% YoY. While France showed a slight improvement compared to the previous year (a notably poor year) in the previous months, recent figures indicate a further decline, even below last years intake numbers. In Ireland, the season has been subpar from the start, and despite optimistic forecasts from most co-ops, we’re still hearing reports of a 1-2% deficit compared to last year.

However, not all is negative. Poland is reporting strong growth in milk intake, offsetting some of the declines seen elsewhere. Still, this growth may not be sufficient to keep the overall supply positive compared to last year.

Concerns About Bluetongue

In the Netherlands, the spread of the bluetongue virus is causing significant concern. Affected farms are reporting milk production declines of 4-10%. With the virus spreading towards Belgium, Germany, and Denmark, similar concerns are being raised by co-ops in those regions. We understand that one of the co-ops in the northwest of Germany is reporting a 4% drop in milk production in affected areas, leading them to revise their production forecasts for the coming months. We expect the news surrounding bluetongue to get more traction as the virus is spreading fast and it seems to be to far out of control to really contain it within the regions affected.

Tighter Supply = Bullish Signal

On the supply side, concerns are mounting. Despite co-ops continuing to push milk prices higher, it seems unlikely that farmers will be able to increase milk intake. Although co-ops are pushing the milk price well over 50ct, we expect that the market will only see more milk once prices rise well over 60ct as we have seen in 2022. Farmers are also faced with increased financing cost, and increased environmental pressure. With the added threat of bluetongue, we expect suppliers to become more cautious in their sales as forecasting future sales becomes increasingly difficult.

Production: Choosing for value

Where did all the milk go in the first half of the year? According to the data we’ve gathered, producers have prioritized cheese and whey production over butter and SMP. This explains why cheese prices have remained relatively stable while butter prices have trended upward. Interestingly, lower SMP production hasn’t had a significant impact on SMP prices, while lower butter production clearly had a bullish effect on that price.

Butter Production: Well Behind Last Year

Butter production has been a key focus for us in recent months. It is the product we broker most, so it has our highest attention. With last year’s year-end balance stock hitting a multi-year low, we have been concerned about how the market will manage shrinking stocks while (worldwide) demand remains strong. Here’s a brief overview of butter production in the first six months of this year compared to last year for the 7 countries of where we see the most butter coming:

Country	2023 (First 6 Months)	2024 (First 6 Months)
Netherlands	68,000	64,000
Germany	260,000	256,000
Belgium	61,000	64,000
France	189,000	185,000
Poland	138,000	132,000
Ireland	139,000	131,000
Denmark	57,000	55,000
Total	912,000	887,000
Deficit	-25,000

With roughly 25,000 metric tons (almost 3%  down) less produced in these countries over six months Europe needs to address its stocks to fulfil demand. But with the commercial ending stocks from last year at just 80,000 metric tons, the market needs the next six months to increase butter production.  Because, even maintaining 2023 production levels would leave the market with significantly fewer stocks. Looking at last year's production numbers for butter, the commercial stocks shrunk from 2022 to 2023 by roughly 30,000mt. So if 2024 would be 50.000mt less butter production (first 6 months 2x) and we would add the deficit of 30,000mt seen last year, we would end the year with.... zero stocks.

Of course, it is not as easy as just assuming all other data will remain the same, we know we need to add nuance. Import, export, and consumption data must also be considered. Looking at that data we see that the EU exported 10,000 metric tons less in the first half of this year (x2 is 20,0000 this year) and imported 3,000 metric tons less (x2 is 6000mt). This would decrease the deficit by 14.0000mt, but it is still a very thin line to balance. So unless EU butter consumption has drastically declined, or butter production drastically picks up, there’s a risk of running extremely low in Q4. High prices for butter will cause both (it kills demand, it should boost production), but the question is how fast these effects will be visible.

SMP: Production Slightly Lower, but Exports Are Down

In the SMP market, production is roughly on par with last year, although down significantly compared to 2022. Reported stocks were historically low in March, but we have seen some stock building over the last months. Looking at the data we see roughly the same reported stock levels as in the previous 3 years.

It might seem strange to see butter production down significantly, while SMP production is roughly on par with last year. We think the answer lies in the price of cream vs.. butter and smc vs.. SMP and the forward curve paid by the market. While cream prices have traded well above the butter price and the butter market missing a strong forward curve, it didn't make much sense to produce butter from cream. But with a strong forward curve on SMP and a relatively ok valorization toward powders, it seemed more local to produce powders instead of selling SMC.

However, while the butter market is less dependent on exports, SMP relies heavily on them to balance supply and demand. Exports are reported down roughly 7% this year compared to last year. However, despite lower exports and production, the SMP market remains resilient, and prices have yet to break down. But the current market dynamics give little room for prices to break out of the sideways market. Stocks way to heavy on the market and Chineese demand has to recover a lot more to really make an impact. With NZ in full season and a fx rate 1.10 euro/dollar the EU export position isn't ideal.

Cheese: More Production, More Export, More Demand

The cheese market is all about growth. The industry anticipated increasing demand, leading to the construction of more cheese factories in recent years. These factories are now absorbing more milk to meet this growing demand. Over 80,000 metric tons of additional cheese were produced in the first half of the year in the EU, without causing prices to drop—an indicator of strong demand. Retail, foodservice, and export markets are all consuming more cheese, and prices are beginning to break out of their balanced range.

We have seen that the impact of the Gouda plant in Ireland has kept prices for gouda steady in the first months of this year. However, even though the market is getting all these extra volumes, with milk expected to shrink in the second half of the year, prices might rebound as supply is expected to get tighter.

With butter prices rising, the competition for milk fat will likely tighten the cheese market, especially for fresh cheeses. Mozzarella prices, for example, have risen rapidly from €3,800 for Q4 just six weeks ago, to over €4,300 last week. Gouda and Edam prices have also increased by about €300 compared to six weeks ago.

Overall, the cheese market appears solid. The industry has the capacity to meet increased demand, but the key question is which market—cheese or butter—will pull stronger on the fat component? We expect both commodities to see additional price increases.

Stocks: Too Expensive to Keep

Stock levels in the market are difficult to gauge, but one thing is clear: it’s becoming increasingly unattractive to hold large stocks. With cheddar prices over €4,500 and butter prices well over €7,000, even small stock positions are becoming a financial burden.

Adding to the challenge are rising interest rates and increased storage costs at cooling and freezing warehouses. Cash-and-carry schemes are currently unprofitable for most products, which suggests that butter and cheese stocks are a lot lower compared to previous years. Conversations with partners (traders, end-users, and producers) indicate that everyone is maintaining minimal stock levels. The premium paid for Q4, both physically and on futures, has been flat or even below the spot market, implying that any stockpiling between May and July was kept to a minimum. This could explain why prices unexpectedly stabilized during that period, despite imbalanced market dynamics.

The only profitable trade seems to be in SMP and SWP, with many partners willing to pay a premium for future deliveries. It appears that the SMP and SWP markets have seen some stock building recently.

Futures Longs vs. Physical Shorts

With producers hesitant to sell forward to end-users, two type of trades have emerged in recent months that could drive the market higher. The difficulty in securing physical product for storage (due to high cash requirements) and the lack of producer quotes (due to uncertainty in milk intake) have led traders to hedge their short positions to end-users (or to other traders) with longs on paper/futures. This isn't a new trade, but is seems to be used a lot more compared to other years.

End-users have also been hedging via index-linked contracts or futures. However, while futures contracts provide price security, they can’t be turned into physical products. Ultimately, a physical product needs to be secured with a physical partner to meet end-consumer demand. Given the extent of hedged positions, we anticipate significant physical buying pressure in the coming months. With milk production in decline, low stock levels, and increased competition among buyers, the situation could become challenging.

Those needing to unwind their hedges will face more competition than usual in the physical market, and it may be difficult to find buyers for futures if many market participants are looking to unwind the same hedge There is also the question if quotations in the Netherlands, Belgium and France will be able to keep up with the expected price increases. A physical short squeeze is a real possibility, while this short squeeze might not materialize in the futures market with limited buyers. The best strategy might be to let futures contracts expire while securing physical products at the last possible moment, but this could lead to last-minute panic buying.

While futures are typically used to hedge against volatility, they could be the source of extreme volatility in the months ahead. Powder buyers might avoid these issues, but our main concern lies with butter buyers. They need to get ahead of the market before their competitors, or they may be forced to follow an out-of-control butter market.

As we brace ourselves for the coming months, it’s clear that the dairy market is entering a period of heightened uncertainty and potential turbulence. With tight supplies, rising prices, and the looming threat of a physical short squeeze, the stakes have never been higher for traders, producers, and buyers alike. In this volatile landscape, staying one step ahead will be crucial.

As we navigate these challenges, let’s remember the old saying: “In the midst of chaos, there is also opportunity.” The key will be to find those opportunities before the competition does. So, buckle up—it’s going to be a bumpy ride, but with the right strategy, it could also be a profitable one. If we at Get Fair Dairy can help and assist, please let us know. We are back and easy to reach via wouter@getfairdairy.nl or on +31 6  57285487