Expensive EU Fat on exiting GDT

Yesterday's GDT ended with a relatively boring headline number. At +0.9%, the event looks dull on the surface. Take a deeper dive into the details, though, and a lot of questions get raised. What surprises us most is the bullish run EU fat keeps making in a global market that keeps printing lower fat prices. EU butter is now more expensive than NZ butter, and US butter on the CME took another nosedive yesterday. Cheddar on GDT corrected sharply too, and US cheese feels anything but bullish. Yet over in the EU — and on yesterday's GDT — European cheese prices are holding up well and feel more bullish than bearish. Milk collection worldwide looks solid, and apart from weak numbers in the UK and Ireland, so far EU milk intakes don't look horrible. The latest French milk numbers (click to see) still track last year's record curve, and liquid traders all see a bit more spot milk available than last week. But still, sentiment on EU fat tells us to switch our view to bullish. Every other indicator keeps us from taking off our bear glasses.

Looking at the GDT numbers, the most impressive print was SMP: a 5.3% uptick, a lot higher than we would have expected. SMP now trades above WMP on the GDT — another confirmation that protein carries more value than fat. WMP was a boring -0.1%: prices remain flat and still sit far below EU levels. EU WMP, just over €3,800, is expected to keep rising if we follow the logic of our partners. As WMP is the lowest valorisation in the EU, production will fall back further and availability should remain very tight. In Eastern Europe we hear WMP prices above €4,000.

Butter and AMF continued lower. Butter dropped a modest 0.8%, AMF 1.3%. But look at the butter details and you can see EU butter trading higher again. German fresh butter at €4,160 and Solarec at €4,220 came in at the level where we expected the market to top off. Solarec for November and December even traded above €4,300 — higher than we forecasted.

On cheese, mozzarella traded flat and showed no movement. Cheddar, on the other hand, took a good step down and now sits around €3,000. CME cheddar trades a bit higher, but with EU prices aiming for €3,800–3,900, Europe is once again reaching a lot higher.

Putting it all together, we continue to see the worldwide trend where protein is on a relentless move up. There are more buyers than sellers, protein feels over-asked and supply isn't keeping up. Across SMP, NFDM and BMP the trend keeps showing upward potential and bullish momentum. The run on EU SMP might slow down a bit after the big moves we have seen, but we would call that a pause, not a top.

EU bullish sentiment on fat — cheese and butter — feels to us like a reflection of the uncertainty around milk collections, less of fundamental reality. In a world where butter prices keep falling and global cheese demand feels so-so, combined with high stocks and high YoY production in the EU, a short-term rally can outlast the patience of buyers, but not the reality of supply.

GFD Markets: hard to connect

Looking at the GFD market for butter, cheese and SMP, we continue to struggle to connect partners. On powders we mainly speak to bullish traders, all willing to sell product and test for higher prices. Cheese is roughly the same picture: a bullish trading spectrum with mainly sellers testing the market. Buyers show little interest and the bids are very low. On butter we see the opposite: a lot of traders who doubt butter's upward potential, yet most of them sit on the buy side.