Flattening the Curve

The last two trading days were once again explosive. Following a bullish week in Dublin, butter and cheese prices continued their upward trend this week, while SMP prices have either stagnated or edged down slightly. Notably, Q4 price increases have been modest compared to the significant gains seen in Q1 and Q2, indicating that the steeply backwardated market may be starting to flatten. Although it’s too early to declare a flat forward curve, the sharp backwardation observed in recent weeks appears likely to diminish quickly in the weeks ahead.

Our morning was unusually active. Butter prices for Q1 traded significantly higher, with Q2 and H2 prices also climbing. While we didn’t secure any cheese trades, reports suggest that Gouda and Mozzarella prices on a DAP basis are approaching, or even exceeding, the €5,000 mark. Although Cheddar and Emmental had previously increased above this level, Gouda and Mozzarella seem to be catching up quickly. Powder prices remain slightly pressured, with a small trade executed at €2,425.

Firmer GDT: Bullish Undertone Underestimated

Market activity slowed in the afternoon as GDT got underway. The overall result was slightly firmer, with a 0.8% increase. EU butter prices rose, with Solarec butter setting a new record at €8,220. Although we expected it to trade higher, there appears to be stronger demand for Solarec butter around €8,200 FCA. Overall, GDT butter prices dipped slightly and were less bullish than anticipated, even though forward prices around $6,500 remain strong. The $2,500 gap between these and EU prices seems unsustainable. AMF also edged down slightly, but there were no significant movements on the fat side this week.

However, the rest of the GDT showed robust demand with WMP up 1.5%, SMP up 2.2%, Cheddar up 2.9%, and Mozzarella up 4.5%. Despite two relatively flat GDT events in a row, we believe the bullish undertone is underestimated. The volumes offered in recent events are high compared to 2-4 months ago. With the NZ peak season approaching, the market is absorbing NZ product without difficulty, despite the so-called lack of Chinese demand. We expected NZ supply to pressure the market, but the continued upward momentum of most products signals a long-term bullish outlook.

Spot Market Liquids: Tight and Expensive

In the EU, spot market demand for liquids remains strong. Cream prices for this and next week are reported between €10,200 and €10,500, with some sellers claiming November prices above €11,000. Raw milk prices are holding firm above 60 cents, and competition for raw milk in Eastern Europe is intensifying. With Christmas production looming, we expect market tightness to increase, pushing prices higher in the coming weeks.

Flattening the curve

As we approach Q4, the pronounced backwardation towards Q1 appears to be shrinking, similar to what we observed at the end of Q2 as we entered Q3. For an extended period, Q4 displayed backwardation against Q3, but once July arrived, the curve flattened and carry returned to the market as time progressed. We anticipate a similar pattern for Q4 versus Q1, although some backwardation towards the early months of the year may persist. In the butter market, where futures recently showed a backwardation of nearly €800, we wouldn’t be surprised to see this reduce to around €500 in the coming days and potentially close the gap as we move into Q4 and November.

In the cheese market, Q1 also shows backwardation. While the logic behind this (higher milk production in Q1) is understandable, we see no data justifying a €300-400 backwardation for cheese in Q4 compared to Q1. As time goes on, we expect the backwardation in the cheese market to diminish as well.

One key factor will be the setting of budgets and the closing of retail contracts in the coming months. Once these contracts are established, we believe buyers will need to enter the market to secure the required quantities. The volatility of recent months has taught them not to leave their positions exposed. Should buyers return to the market before milk production increases, we expect the backwardation in cheese to shift towards contango, similar to our expectations for butter.