Fading Fundament

Yesterday, it seemed like the foundation under the market was slipping further away. The butter market appears to be taking the lead, but the powder market also shows significant weakness. Cheese prices seem to be holding up reasonably well, but there is a weakness in EEX futures as well. All in all, the pressure from the flush seems to be having the expected effect of exerting pressure.

For powder, we still see the weakest foundation. Although stocks in the EU and US are low, and production doesn't seem to be fantastic either, it is the weak demand that is truly the main concern here. Especially the disappointing demand from China, which has been a mainstay for the market for years, does not seem to be returning anytime soon. Add to that the upcoming Ramadan won't inspire much activity in the Middle East, so a boost from demand in de Middle East also seems unlikely. Looking within the EU, we see skimmed milk powder feed prices continuing to slide further down. We are already hearing prices at €2175 in Q2.

The butter market has also taken a significant step downwards. With prices for NL/DE/BE around €5600, the price of €6000 suddenly seems very far away. While producers still remain distant from the prices we see among traders, we hear that some producers are testing the waters with a few loads here and there. However, we do see a stronger foundation in the butter market. At prices around €5500, there is significantly more interest from exports, and the internal EU demand also seems very healthy at prices between €5500 and €5700. It remains to be seen how long these bids will stay in the market because producers, who were very optimistic in recent weeks, can quickly turn that optimism into caution.

The cheese market still seems reasonably stable, although we do see some more pressure on the futures. It is not illogical to think that when both the protein side and the fat side of the market decline, cheese must also follow suit. Yet, from the producer side, there doesn't seem to be any reason to offer lower prices at the moment. In fact, we saw higher quotes today rather than lower ones.

The conclusion that many draw is that with the current payout prices, the favourable season start in France and Germany, along with good weather, the supply will ultimately be more determining than the relatively lower stock levels. Add to that the subdued export demand for cheese and skimmed milk powder, and you have the right ingredients for a market correction. However, we continue to caution, as the milk supply is not overwhelmingly great yet in all EU countries, and the strong season start in France and Germany seems to be primarily driven by mild weather. An early end to the milk season is something to be cautious about. And don't forget, lower prices can also quickly attract export demand again, and once this happens, prices for all commodities can rise rapidly.