Market Update June 12, 2023

Hi everyone,

Welcome to the OpenDairy market update.

We look back on an active week with different opinions in the market. It seems like there is selling interest for prompt deliveries and more buying interest deeper into the second half of the year. Most futures markets show a nice contango, except for the New Zealand prices on GDT, anticipating on a strong season ahead in Oceania.

In the last weeks, different reports came out about hedge funds having record short positions on commodities, especially crude oil. With liquidity on futures markets increasing, we thought it was nice to re-open an old discussion about the correlation between oil and dairy prices. As you can see, the correlation between US oil and Class 3 milk in the US, is not as clear as the graphs suggest. At some times, the correlation is even negative.

We have looked at natural gas as well, and found the same conclusions.The rationale behind the suggested correlation is clear. Oil prices are an indicator of the world economy as more demand for goods and services requires more energy and vice versa. An other interesting dynamic is that most net exporting countries in the world are net importers of dairy and other food products. Higher prices for oil increase the buying power of those importers which results in a stronger import demand. And on the supply side, a large part of the costs of milk production goes into energy.

Farmers confronted with higher cost prices will ultimately require a higher milk price, or would cut production and therefore supply. So, back to the newsflash about hedge funds being short on commodities. What does this mean for the dairy market? And how would a possible recession affect dairy prices?

Our conclusion is that true correlation does not exist. The dairy market is influenced by a lot more factors than pure consumer demand and farm economics. Droughts, floods, nitrogen caps, government regulation, import tariffs, currency availability, logistics bottlenecks, are all influencing the state of the dairy market. And with milk being produced continuously around the globe, new information is available every day.

A major difference with oil is that ramping up and cutting production involves actual animals, and therefore delays the effect on the market significantly. And last, but not least, we are dealing with sentiment. We spend a lot of time discussing our opinions on the market and sharing facts and rumours about the state of the market. But where hedge funds are record short on commodities, we don't believe the average dairy trader is record short on dairy products today. It seems like we're facing a period where dairy prices will be determined by it's own fundamentals and sentiment and less about the state of the global economy.

Different opinions in the market allow trades to happen, but finding direction is hard. The market still seems rather balanced with stocks available for prompt, good outlooks for New-Zealand supply and demand still not plentiful. For those looking for more volatility, keep an eye on the oil market, as we can expect fireworks there.

Thank you for your attention and have a great week ahead.

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