Backwardation on Fats, Contengo on proteins

Yesterday, the market followed a typical Monday pattern. The morning was filled with casual conversations about the weekend, but by the end of the day, activity picked up, especially in the butter sector. Powder buyers are waiting for the Global Dairy Trade (GDT) event, while the cheese market sees determined sellers at higher prices and patient buyers on the other side. It seems the market is in need of a Tuesday impulse, possibly from the GDT or spot market activity for liquids.

Our outlook for today's GDT event was shared, and most of our partners generally agreed. There were some more negative predictions for the fat side of the market by our partners, which we receive regularly, but these often still result in higher prices. In the last event, EU butter prices were around $7250, and we expect them to rise to $7500 in this event. NZ butter could also see a bullish run, with prices likely to rally further.

Interestingly, the fat market on the SGX is heavily backwardated, similar to the EEX. Q1 2024 futures are significantly discounted compared to Q4, and the CME shows a similar trend. A backwardated market typically signals a bull market, suggesting that participants expect current high prices won't last. However, it's puzzling to see this backwardation in Q4, as there's no likely scenario we can think of where the supply and demand ratio for fats (especially in the EU) will shift before the end of Q4.

For proteins, the opposite trend is observed. The market is in contango, indicating a bear market. Participants foresee limited short-term upward potential but significant potential further out. On the EEX, the contango is strong, with prices up almost 20% for spot versus 12 months ahead. SGX and CME show similar contango patterns.

Globally, expectations are bullish for fat prices and bearish for protein prices. Cheese (a nice combination of the two) prices, meanwhile, are trending flat. While there have been some global increases, they haven't been as sharp as in the fat sector. Increased cheese production capacity (over the last years) is diverting a lot of milk from butter and SMP/NFDM production, making these products fundamentally bullish from a supply perspective. However, with protein demand down and fat demand steady to rising, fat prices are rallying while protein prices remain stagnant.

To divert milk from cheese production, fat prices would need to increase significantly more than cheese prices. But with mozzarella prices also rising, this scenario seems unlikely. We expect butter prices need to rise another 5-10% to incentivize producers to shift milk to butter/SMP. Despite appealing fat prices, increased protein production could hinder the valorization model.

Discussions with producers and those closely connected to them suggest that the current backwardation in fats and contango in proteins will likely persist for a few more months.

Butter: Higher Prices? Not Everyone Agrees

We are 100% bullish on fats, but we did get some pushback from some of our market counterparts. It seems via some of our colleague brokers prices for butter in Q3 traded down a bit compared to last week. But as we always say about our own trades", a single trade doesn't make the market, two trades signal a possibility but only a series of trades over multiple days signal a trend. We would still see the market as bullish. We brokered sweet cream butter for June at € 6475 and Irish butter for Q3 at € 6800,-.

Speaking to our friends on liquids the expectations are tense. We understand the demand for closeby remains firm with bids between € 8000-€8100 FCA and offers at € 8300 and higher. If sellers are able to hold firm to their prices we expect the market to move towards € 8300 levels.

We start the day with

• an offer for 6 trucks for June/July on Irish butter, FCA NL at € 6800
• an offer for 2 trucks of Italian Galli butter for June at € 6600 DAP NL
• an offer for 6 trucks NL/DE/BE fresh/frozen for Q4 at € 6825
• an offer for 1 truck of fresh Sachsenilch butter for June at € 6950
• an offer for 1 truck 10kg block GvH fca NL at € 6750 for June

Cheese: No Updates

On the cheese side of the market, we see no updates. It became a bit more apparent that the market was lacking sellers, not products. But it seems some of the sellers are reporting back for duty, taking away the expectation that cheese prices will rally like the butter prices did. We do think that with butter prices toward € 7000,- cheese buyers should not gamble cheese will remain widely available. If buyers push prices back down, we expect the expected shift in s/d balance to become a reality during Q3.

We would still have roughly the same market

• an offer for 4 trucks of Gouda for July/August at € 4180
• an offer for 4 trucks of Mozzarella for June/July at € 4150

We also have buyers

• a bid for 6 trucks of Mozzarella for Q3 at € 3950
• a bid for 4 trucks of emmental for September at € 4600 (slicing quality)

Powders: GDT to lead the sideways direction

A typical Monday means our partners suggesting us to wait for the results on GDT. A typical GDT means that no matter the result, the sideways action of the previous months will probably continue. Although we remain firm on our market outlook, we do understand that we are not surrounded by many partners here. Speaking about our more bullish market expectations, it became apparent that the demand from SE Asia we talked about is not felt by many others.

We do however forecast a slightly more bullish price on the GDT, this might trigger a bit of buying appetite in the EU. It is not we are sure about the upside, we are just convinced that there isn't a lot of downside.