De-Risking in Dublin

Last week was another bullish week for the dairy market. Butter prices dipped early in the week but rebounded from Wednesday onward. Cheese prices continued their steady climb, and powder prices have reached their highest levels this year. The ongoing debate about the sustainability of these price levels is a constant theme in our discussions. Some suggest that early signs of demand destruction are starting to appear, which, if accurate, would indicate a surprisingly swift reaction to the price increases since the start of summer. We hear that retail negotiations are tough and that margins in the retail sector are under pressure. If prices rise sharply in the coming weeks, these increases could be passed on to EU consumers more quickly than usual. Currently, the data favors the bulls, so our outlook remains bullish until we see concrete bearish indicators.

Milk Collection Trends

The trend in milk collections remains unchanged from previous weeks. France reported a year-over-year increase in recent weekly data, but this compares against a particularly poor year. French collections are still well behind 2022 and earlier levels. Germany is also losing ground compared to last year. In Ireland, despite expectations of a recovery in milk collections by year-end, they remain below last year’s levels, with weather likely to determine the final outcome. The latest numbers from july (-3,3% YoY) show that the anecdotal feedback we were getting falls in line with the data. Dutch milk collection has been reported down -3.6% as well earlier.

Fear of Missing or Hitting the Market Top

Last week’s volatility prompted us to reflect on its drivers. A significant factor is the herd mentality, as discussed in our previous article. Another major influence is the traders fear of missing the top. In 2022, many traders forecasted price drops in Q1 and Q2 of 2023 and positioned themselves by selling short, even as the market accepted high prices further forward. The profits made in 2023 were set up in the fall of 2022, and we've seen the results—many of the largest trading houses in the Netherlands hit all-time highs.

Trader	Turnover	Net Profit	Profit Margin
Hoogwegt	€3.46 billion	€15 million	0.43%
Interfood	€3 billion	€71 million	2.38%
Numidia	€917 million	€16 million	1.74%
Farmel*	€553 million	-€5.5 million	-0.99%
Geris	€369 million	€7 million	1.92%
Fresena	€285 million	€5 million	1.75%

Traders now see similar commodity price reported in Q4 as in the same period in 2022. And it’s tempting to think the market in 2025 will mirror 2023. But as Mark Twain said:

"History Doesn't Repeat Itself, but It Often Rhymes"

As prices started to decline last week, traders seemed eager not to miss opportunities similar to those in 2023. Chasing the buyers they pushed down prices (mainly on butter) by almost € 600,- in two days. Conversely, buyers who locked in high prices at the end of 2022 are reluctant to repeat that experience, only willing to commit if offered those significant discounts. These dynamics will make the market extremely volatile we expect.

This fear of missing out or hitting the market peak is creating new dynamics that may lead to a very different market behaviour compared to 2022/2023. The forward curve for 2025 is pricing in a full reversal just as seen in the 2023 market. The question is if such steep declines are that likely? Given current supply and demand dynamics which differ a lot from those in 2022. Butter prices, for example, are projected to fall by €1,500 from October to May, a scenario that seems improbable without substantial changes in S/D. Cheese prices are also in backwardation by about 10-15%. While this isn’t impossible, it feels almost wishful to see the market anticipating a repeat of 2023 without similar warning signs. If anything, the current signals remind us more of the early stages of the 2021 price rally.

At this moment we see most traders and end users would like to see prices trade back down. These high prices are not only causing difficulties for buyers, but traders also face restriction issues due to high prices. High financing costs, harder ways to get insurance and fear for customer survival are causing them to derisk not only in price but also in exposure to customers. For those sceptical about further increases, we suggest looking at other commodity markets like cocoa, coffee, and orange juice, which have seen similar upward moves.

De-Risking in Dublin

This week, StoneX is hosting its annual risk management course in Dublin, underscoring the importance of effective risk management in this volatile year. Many of our Dutch partners will be in attendance, and so will we. But it's not only the dutchins de-risking in Dublin. Many of our partners are present, underlining the importance for them as well to manage their risk. For those interested in connecting in Dublin, please reach out; we’d love to discuss market insights and receive feedback on our services.

Market Outlook

Our outlook for this week is stable but remains bullish across all dairy commodities. From the last two years, we saw that markets tended to stabilize in the week leading up to the StoneX event, with many participants seeking insights and market wisdom. If the current bullish sentiment gains traction at the event, we could see markets trading higher in the second half of the week as herd volatility amplifies with so many industry players gathered in one place. We see little reason to expect a slowdown in price rises.

Slightly colder weather in parts of the EU might temper demand for fresh products, potentially loosening the spot market for liquids. However, even if prices dip for cream, SMC, and raw milk, we have little doubt that core commodities like butter, Gouda, mozzarella, and SMP will continue to hold firm.

For those attending Dublin, we look forward to seeing you there. For those not attending, we will keep you updated—though we apologize in advance if the Guinness and whiskey lead to slight delays in our reports later this week!