Doubting About How Bullish We Are

Over the last two days, we haven't found a moment to write our report, but we managed to recap a bit what we have been seeing now for days. Despite prices trading relatively sideways, our bullish outlook on the market continues to strengthen based on current observations. After spending five hours in discussion with our partners in Dublin, over drinks and snacks, our view is clear: the dairy market is set to trade upwards. While the rise may not be in a straight line, the direction appears evident.

Doubt About Milk Intake

Our conversations last night highlighted a significant concern in the market regarding milk collections. July collections were subpar, August numbers look weak, and the early signals for September are also below earlier expectations from this year. Despite a slow rise in payout prices, we do not anticipate a return to 2022 levels (above 60 cents) that previously spurred milk production. The forward curve on butter and cheese suggests we may peak in November, raising doubts about co-ops' ability to offer appealing milk prices in Q1 2025. Without a clear incentive for farmers to increase production, we are skeptical about any significant rise in EU milk collections in the coming months. The US is also showing a slowdown in milk, causing two of the biggest dairy suppliers, to perform under budget and expectations.

Doubts from Buyers

Another reason for our bullish stance is the hesitation we observe among end-users. Feedback from food service industries, retailers, and other buyers reveals a growing reluctance. Without confidence that price increases can be passed down the chain, buyers are slowing their purchasing strategies. While they are actively seeking offers, the prices they encounter often exceed their budgets, prompting further delays in purchasing. As one contact put it, they are stepping back from the market, not stepping away, at some point these buyers will have to come back. Demand destruction has not yet materialized but remains a concern. However, we believe the EU consumer can still absorb slightly higher prices.

Doubts from Producers

It's not just buyers who are uncertain. Butter producers, in particular, are grappling with what to do with their stocks. Maintaining inventory above €8,000 is costly and speculative, and producers typically adopt a risk-averse market approach. Conversations suggest that butter and cheese stocks are extremely low, and producers are forecasting conservatively due to pressure on milk production. This cautious stance may lead to more spot volumes if collections improve, but for now, it has resulted in tight short-term availability. Q4 offers are scarce across most products, despite evident buyer demand.

Doubts from Traders

While producers and end-users are cautious, traders are perhaps the most hesitant of all. It’s been a long time since we’ve seen such indecision among traders. Fundamentally, most are bullish: they see lower milk intake, low stocks, and poorly covered end-users, all pointing to higher prices. However, the current high prices are causing concern, keeping traders from committing to long or short positions.

Doubts About the Doubts

As we reflect, we question the extent of the doubt we observe. Interestingly, producers are undoubtedly bullish but hesitate to position their companies accordingly, fearing sudden price swings. End-users, too, are fundamentally bullish but lack the confidence to act on it and buy without their customer confirmations. Finally, traders, when pressed, also lean bullish but are held back by the fear of high prices. Most seemed to be positioned balanced so they could sell short as soon as the market turns. But up until that moment, it feels the market therefore can only trade one way

The danger in a bullish market is that when everyone shares this sentiment, they often position themselves to benefit from it. We’ve seen markets with bullish traders (holding long positions), bullish producers (stocking up), and bullish end-users (covered forward) quickly turn bearish when sentiment shifts. Just as we have seen bearish markets turn bullish in days. This time feels different. The fear of being wrong is preventing market participants from positioning themselves fully. From our discussions with traders, end-users, and producers, the market appears perfectly poised for higher levels, with some commodities on track to break records.