Violent Corrections Rattle Dairy Market Confidence

If last week was best described as extreme, then the first two days of this week comfortably qualify as absurd. After butter and powder prices pushed to recent highs on Friday, the market wasted absolutely no time in changing its mind. By Monday morning, butter prices were trading almost €700 below Friday’s highs. And while we were already of the opinion that Friday’s levels were generously overpaid, the speed and depth of the correction toward tuesdays lows feels equally excessive. Two wrongs don’t make a right, but they do make for impressive volatility.

The simple fact remains: both butter and SMP corrected sharply lower across the EU and the US. The hot air ran out of the market, forced buying evaporated, and the most frequently asked question yesterday became a very honest one: “Now what?”

To understand what comes next, we first need to be very clear about what actually happened. And the more partners we speak to, the more confident we are in one conclusion: Last week was a textbook 100% short squeeze.

Every buyer we spoke to had more or less the same motivation:

• Protect margins
• Hedge exposure
• Get positions back to zero / get long

There was very little “belief buying” and a lot of defensive buying. Based on our conversations, most market participants reading this update likely moved from short to position-neutral, or even slightly long. Even on the end-user side, we heard of several large players contracting significant volumes last week to minimise whatever exposure they still had left. Buying appetite of that magnitude explains both the speed and the violence of last week’s rally perfectly.

When we asked a seasoned trader late on Friday what typically follows such a move, his answer was refreshingly unsentimental:

“After an aggressive short squeeze, the market usually enters a rapid post-squeeze unwind, with prices correcting sharply as forced buying disappears.”

We briefly considered asking him for the lottery numbers as well — because that is exactly what we have seen unfold over the past two days.

Once buyers neutralised their positions, they returned to the fundamentals and discovered that… not much had actually changed. And being flat in your market position has a wonderful side effect: it frees the mind. Looking at the market without exposure, many concluded that being short again at elevated levels suddenly made sense.

Why the Market Fell So Fast

The problem post-squeeze is simple:

• End users don’t urgently need the product anymore, some might even be overbought for a bit, as there were the cheapest offers available.
• Traders no longer have shorts to fill, some even have longs now to liquidate
• But Holding a long position suddenly feels uncomfortable

Finding buyers after a squeeze is always harder than during the squeeze itself. Some traders who slightly overcompensated and went long last week unwound those positions quickly, pushing prices back down toward levels that feel more in line with the current supply & demand balance.

Recap: up — and straight back down.

What We Actually Saw Trading

SMP

• Prices rallied sharply, initially triggered by higher CME levels
• On EEX, futures traded up to €2,850 for Q2 and €2,900 for Q3
• Today, offers are roughly €300 lower
• Physical bids around €2,650 disappeared
• Replaced by offers:
• €2,400 prompt
• €2,425–2,465 for Q2/Q3
  • Bids for Q2 struggle to exceed €2,350 for Q2

Butter

• Q2–Q3–Q4 traded as high as €4,950 for NL/DE/BE butter (futures H2 traded well over € 5000)
  • Yesterday’s lowest offers:
  • €4,200 for Q2
  • €4,375 for Q3
• Spot butter:
• €4,050 sweet cream
• €4,075 lactic

Anyone who left the market on Monday morning last week and came back Tuesday evening would struggle to believe they missed one of the most volatile and extreme dairy markets we have seen in years.

What’s Next?

A fair question — and an uncomfortable one. Because while we are happy to share our views, our guess is no better than yours at this stage. Adrenaline, Cortisols and Dopamine are now in charge of this market. As markets are thin, there is no need to read too much into every small uptick or downfall. We expect wide markets and big overreactions on small volumes to dominate the current weeks.

Markets feel thin on both sides across almost all product groups. Try to buy 1,000 mt of butter, and you can still push the market up €200 with ease. Try to sell 1,000 mt, and the market loses €200 just as effortlessly. Liquidity is fragile, conviction is scarce.

From a purely fundamental perspective, one could argue for:

• SMP stabilising around €2,350–2,400
• Butter drifting back below €4,000

But that may be a little too neat.

Violent rallies like the one we just experienced tend to damage something markets desperately need: confidence and conviction. Without strong conviction about where prices should be, the market often does the only thing it can — float sideways, with low liquidity and limited participation.

Eventually, direction will return:

• Either via a fundamental pull from demand
• Or a push from supply

But that, dear reader, may well take a few more weeks.

Lessons Learned (Again)

Markets are excellent teachers — even if the tuition fees are high:

• Buyers learned (again) not to chase markets higher in panic; fundamentals have a habit of reasserting themselves
• Traders learned not to sell markets short near historic lows — when liquidity dries up, chasing prices higher gets expensive
• Producers were reminded why keeping a small long position pays off when markets suddenly run

For now, uncertainty reigns, volatility stays elevated, and conviction is on holiday. The market is catching its breath — and so, it seems, are most participants.

We’ll keep watching.