Butter Prices Below SMP, Or SMP Prices over Butter?

Last week we saw powder prices take another step up, while fat prices took a step down. Mozzarella, Gouda, cream and butter... these markets feel heavy and under pressure. And sure, we hear the stories that WPC80 prices are softening, but whey also remains expensive and well supported. Proteins show a really strong foundation, while butter (and cheese) continue to show weaker signals. For farmers, the lower fat prices are not yet translating into lower contract prices; proteins continue to do the heavy lifting. In the EU the forward curve for fat remains well supported, but those who see the US as a window into our future might not be that optimistic.

On the 19th of March, for the first time since 2014, we saw NFDM prices in the US trade above US butter prices. While some expected a short rally, that gap has since widened. Yesterday, the NFDM spot call on the CME traded at $2.18, while the butter spot call traded at $1.37. Looking at the forward curve, NFDM trades above butter on the CME all the way up to April 2027. That says more about butter prices than about NFDM, as the NFDM curve on the CME is heavily backwardated. The US butter forward curve remains well below $1.90 all the way out to December 2027. That's roughly €3,900 in 82% butter equivalent.

While we were discussing this trend, someone asked us whether, to our recollection, SMP prices have ever traded above butter prices. We were fairly sure they hadn't in our 12 years of trading experience, and looking more closely at the data, we couldn't find a single time they did. Maybe a few single loads changed hands where SMP prices exceeded butter prices, but the data doesn't show it. Via StoneX Plus you can combine any data source you like, and while the markets have traded close to each other, up until now butter in the EU has always traded at a premium to SMP.

Look at the line chart and you will see strong resistance for powder prices around the €3,300 level. Only in the heated rally of 2022, when milk volumes were under pressure, did SMP manage to break above €3,300. Yet today we see the market breaking above that resistance level, and buying interest on the futures curve looks very strong. Feed SMP for Q1 is even trading at €3,400.

For the more technical analysts: butter clearly has a very strong support level around €4,000. Over the past 10 years it has acted as a floor more often than as a ceiling. Again this week we saw sellers stepping away from the market as soon as we mentioned prices below €4,000. This year, however, spot has traded just below €4,000 since May, so for the spot price €4,000 has acted as a ceiling rather than a floor.

But let's be clear: the data suggest there is hard resistance for SMP above €3,300 on a longer timeframe, and strong support for butter at €4,000. So how likely is it that we will see butter and protein values in the EU switch places? The US has been our guide over the past year, and we would argue the EU will continue to mirror the same trends, albeit within its own bubble.

Butter: Stepping down

The butter market is taking another step down. Last week we started with bids at €4,000 for Q4 and €4,200 for Q1, but these prices slowly but steadily traded down towards yesterday's levels, where Q1 traded at €4,100 and Q4 as low as €3,825. We have said it for months: Q4 demand already seemed largely covered before the summer, and since our return at the end of August, activity on Q4 has been slow. Even our Q1 markets are starting to show more pressure on the sales side, with limited buying interest. We understand producers are targeting Q1 bids, as those are well above the bids for this year.

For fresh butter we continue to see offers at €3,900, but older, less conventional products are offered at €3,800 FCA factory, with bids well below these prices. Cream traded last week between €4,600 and €4,900, but offers for next week already started coming in early this week, suggesting prices might correct a bit further.

As for our view on the butter/SMP turn... with pressure on spot, we think older, frozen butter might take a deep dive, to slightly below where we think premium SMP can trade. But we are a bit skeptical about a sustainable divergence between protein and fat.

Our markets this morning look a bit like this:

• Q4 NL/DE/BE fresh/frozen: bid €3,725, offered €3,900
• December EU15 fresh/frozen: offered €3,900
• December Kerry Lactic fresh/frozen FCA NL: bid €3,850, offered €3,950
• Q1 NL/DE/BE fresh/frozen: bid €4,050, offered €4,100
• Q2 NL/DE/BE fresh/frozen: bid €4,250, offered €4,350

Cheese: Correcting, not Crashing

The cheese market is not crashing, but it continues to correct. Some say it's following the butter slide, others blame slow retail demand, and others see more competition on exports. We see it as a combination of all three. Speaking to our partners, demand is just a bit slow, and with butter taking a step down, nobody really expects prices to jump higher. Combine that with the reported record-breaking production numbers, and the data suggest there is plenty of cheese around.

On the export side, the heavy cheese market in the US isn't making the picture more bullish, and strong milk production in Oceania is also putting more Mozzarella and Cheddar offers into the typical European export destinations.

We would argue supply isn't causing the market to crash, but zoom out and you'll see that over the last 5 weeks the market did shed between €150 and €200 per mt. Our opening markets should look something like this:

• Spot Mozzarella: buyer at €3,350
• October NL/DE Gouda: bid €3,400, offered €3,475
• Q4 Mozzarella: bid €3,375, offered €3,425
• Q4 Gouda: bid €3,400, offered €3,500
• November Emmental, grating quality: offered €3,600

Powders: Looking at €4,000

We are known as butter bears, but we are starting to build a reputation as powder bulls. We said it before the summer: this market had every ingredient to turn incredibly bullish in Q4, and so it has. And the ingredients to push the market even higher keep showing up: expensive SMC prices, oversold producers, very short-covered end users, big tenders about to open, a short-covered feed market, expensive whey proteins, and a CME spot call that trades at $2.18/lb, which translates to well over €4,000 SMP equivalent. How many ways can we tell you we expect more upside? We don't know if the market will break records like it did in 2022. It has shown firm resistance at higher levels. But over the next 3–6 months, this market has all the ingredients to make an attempt.

With Linda away from the market for two weeks, Wouter and Joey are handling the trades, so reach out to them if you want to discuss the markets. Yesterday we traded low heat SMP for October at €3,310 and German Codex for Q4 at €3,350. Speaking to producers, they continue to see new buyers popping up and requesting early call-offs. Futures are eyeing €3,400+ for Q4, and on the EEX screens we saw a €3,500 trade.

We expect to start the day with the following offers:

• 50mt Polish SMP non-standardized, FCA PL, prompt: €3,360
• 50mt French SMP non-standardized, FCA NL, December: €3,450
• 200mt Dutch SMP, DAP NL, October: €3,375
• 300mt German SMP, FCA DE, Q4: €3,375

Final note

To sum up: fat is stepping down, protein is stepping up, and the gap between the two is getting smaller. Butter is testing the €4,000 level from below, cheese is correcting but not crashing, and SMP is breaking through a resistance level that has held for years, apart from 2022. The US has already shown what happens when protein overtakes fat. We expect the EU to follow the same direction, but we are skeptical that SMP will trade above butter for long. Older, frozen butter may briefly dip below premium SMP, but in our view the long-term relationship between fat and protein still holds.

For now, our advice is simple: keep an eye on Q1 butter bids while they are still there, and don't wait too long to cover your protein needs for Q4.

With Linda away for the next two weeks, Wouter and Joey are available for all your questions, bids and offers.

GFD, Good trading 🤝