Milk output is not falling as fast as some had feared. Production is holding up across the major exporting regions, and the market has had to absorb more milk than expected. Protein is what has kept the dairy complex from sliding lower across the board: demand for milk protein has performed far better than expected, carrying SMP to multi-year highs. Fat is the loser. All that additional milk and milkfat has to go somewhere, and to find a buyer it has to be cheap. With the Q4 sales window closing, butter sellers are running short of time, while SMP buyers who held off on coverage now face a market with very little product.
Butter keeps building
The global butter market remains weak, with oversupply in every major origin building stocks and pushing prices down, as it has for well over a year. Europe feels very heavy again at the start of Q4. Spot prices have fallen significantly, with plenty of butter on offer and few Q4 buyers in sight, and the entire forward curve has moved lower. Most of the selling pressure appears to come from traders rather than producers.
The United States has the same problem. Butter production rose about 6.3% year on year in August, and cold storage stocks went from well below last year’s level to above it. CME butter dipped as low as $1.31/lb on Tuesday. In New Zealand, butter slipped at this week’s GDT event to $4,775/mt for contract 2, and exporters are struggling to find buyers because many importers have already stocked up. Vesper expects butter to keep falling until production slows meaningfully or prices drop far enough to attract new demand.
Protein moves the other way
SMP prices are rising quickly again, with futures and the GDT event driving much of the momentum into the final months of the year. In Europe, buyers with uncovered Q4 positions are meeting a tight spot market where prices move up every week. Production margins are fine and milk is plentiful, but few stocks were built, so little volume is available for Q4.
The US market is structurally tight for milk proteins. CME nonfat dry milk spot traded at $2.2475/lb on Tuesday, only $0.05/lb below its May peak. The latest US production data show a notable dip from a July figure that had been lifted by an outage at a large consumer of ultrafiltered milk. Oceania prices are following the US higher. Vesper expects SMP to keep rising for now, and sees a turn only after a significant change in the availability of liquid skimmed milk and a few months of buyers holding off.
WMP sits in between, pulled down by butter and up by SMP, and is barely moving. In Europe it is anchored to fair value against the two, which has crept up because of SMP’s weight in the calculation. At the GDT, New Zealand WMP rose only $35/mt to $3,550/mt for contract 2. Vesper expects European WMP to hold around current levels, or slightly higher, through the end of the year.
