Market outlook

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Market Outlook | 13 January 2022

At the start of the year, milk prices remain firm and both EU and US SMP prices continue to rally. For now, increased farm gate prices and inflation have not led to a change in market direction.

Skimmed Milk Powder

In the first week of 2022, both the CME (+USD 120/mt in week 1) and the EEX quotations (+EUR 80/mt in week 1) showed higher numbers compared to previous few weeks. As most buyers are coming back from their end of year break, it is clear that many still need coverage. Both EU clients and export clients are still making enquiries for Q1 and Q2 requirements. The trend for short-term coverage therefore remains and, based on the feedback Bdairy is receiving, this will continue.

In general, there is a belief (or a hope) that prices will ease once milk collections increase at the start of Q2. In the light of this argument, and with current prices at an historical high (EU SMP trading at EUR 3450/mt FCA and US at USD 3725/mt FCA), buyers may decide not to extend their coverage.

From a supply perspective, EU producers report having minimal stocks and US stock levels are also deteriorating (falling from 162k in May 21 to 92k mt in Nov 21). Q1 volumes are mostly sold out and sellers are conservative about providing Q2 offers.

Furthermore, it is becoming clear that NZ will collect less milk this season compared to the year before. October and November showed a 3.1% and 1.2% decrease YoY, respectively.

One could question, are there any arguments that do not support a bullish market? At Bdairy, we believe that global demand could be impacted. Price inflation generally leads to reformulation and (partly) to a change of diet. Especially in countries with less spending power (e.g. Africa and parts of Asia), expensive dairy products might be replaced by other foods. This trend was previously seen after SMP price rallies in 2007 and 2013.

However, given the short-term requirements of many customers and the lack of physical stock, we believe that SMP prices will rally further in the coming weeks.

Bdairy outlook: Bullish

Butter

Although EU butter prices have not yet reached the historical price levels of September 2017 (Dutch quotation at EUR 6960/mt), EU milkfat prices are at the second highest level in the last 10 years and this contributes to high milk prices for EU farmers. Based on today’s EU cream and EU skimmed milk concentrate prices, a farmer would receive up to 55 eurocents per litre.

Whether all of this will generate more income for the farmer is questionable. Many processors and farmers are pointing to the elevated prices for fertiliser, feeding, energy, packaging, etc. These increased costs could have an extensive impact on farmers’ margins.

In the US the same argument is being used to explain the lower milk intake figures between September and November 21 compared to last year. This means that, even though farm gate prices are improving, farmers’ margins are not increasing.

When we zoom in on the EU butter market, the availability of liquid cream has improved in recent weeks. More cream availability is being reported from the eastern EU in particular and this has also impacted butter prices (these dropped to EUR 5700/mt FCA). Traditionally, Polish producers prefer to sell mostly for the upcoming month and often base their prices on the availability and price of liquid cream.

The improved availability of cream has also given some relief to the western EU market, and prices have eased to EUR 100/mt (EUR 5800/mt FCA for Q1). For the remaining quarters of 2022, there is a consensus in the market that prices could ease further and offers could be presented at discounted levels.

From a demand point of view, many end users have short-term coverage. Historical high prices and resistance from retail to push inflation back to the final consumer prevent end users from covering future needs.

As many end users are maintaining this buying strategy, we believe that the EU butter market will remain extremely nervous and could change direction from week to week, depending on how many end users step into the market.

For now we forecast a slightly lower market price level based on improved cream availability.

Bdairy outlook: Bearish

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