Market Update - February 10, 2023

Hi Everyone,

Welcome to the OpenDairy market update. 

In our last market update we predicted a dynamic market, and dynamic it has been! The market corrected sharply on both the fat and protein side. The sentiment was reflected in the last GDT results. WMP and cheese moved up, butter and AMF even more. SMP appeared stable compared to last GDT, but showed a significant increase against the spot market levels of the last week. 

So, what changed, so suddenly? The gap between farmgate and spot prices in Europe didn’t disappear. The stocks in China, Europe and the US didn’t evaporate. And the participation in this event wasn’t great either.

Some people in the market are talking about a so called short squeeze. When the bull run ended early Q4 last year, many players in the market have speculated on lower prices, and rightly so! Farmgate economics, building stocks and lockdowns in China pushed the market in a strong bearish sentiment. The anticipation of Chinese buyers coming back to the market after the festive season sparked activity to reduce positions. Fundamentals didn’t change, but it’s better to be safe than sorry. We noticed end user demand was limited during the increase of prices. 

So back to the term “Short squeeze”. This originates from the stock market in which sellers would short-sell stocks in anticipation of lower prices. A sudden event, or just simply some profit taking could spark a stabilization which forces other players to close their positions as well. This could cause an overreaction, leading to more margin calls, more position closings, etcetera. Is this what we experienced in the last weeks, or do we see fundamental support and more demand due to the lower prices? Time will tell.