Trends End. But until Then, They’re Your Friend.

Last week was relatively quiet on our end, though the market eventually managed to produce some new trades. Butter traded down, SMP traded back up, and cheese produced some trades slightly higher than our previous ones. One thing we have noticed over the past few weeks is how quickly trading activity dries up whenever the price trends we have been following for months show even the slightest sign of reversing. And just as quickly, activity picks up again when those same trends resume.

We think this tells us quite a bit about the current market. Most participants seem increasingly eager to catch the turning point, rather than follow a trend that has already been running for months. Some are even willing to position themselves against the current direction, expecting the market to reverse sooner rather than later. And while we understand that reasoning, history tells us that trends have a habit of lasting much longer, moving much further, and remaining much more consistent than most people expect.

Ironically, part of the reason lies in the behaviour of those same market participants. When prices move against expectations, buyers and sellers hesitate, waiting for confirmation that the market is finally turning. But when that confirmation fails to arrive and the original trend resumes, they eventually return to the market, often adding further momentum to the very trend they expected to end. And so the trend continues, not necessarily because the fundamentals have changed, but because the behaviour of market participants keeps reinforcing the direction in which prices were already moving.

But ultimately, trends don’t end simply because prices have moved too far, or because market participants believe a reversal is overdue. A lasting change in direction requires a fundamental shift in supply and demand. And that brings us to one of the biggest challenges in analysing the dairy market: fundamental data reaches us much more slowly than price data.

Prices change every day, while reliable production and consumption figures often arrive months later. As a result, price movements are sometimes mistaken for evidence of changing fundamentals, when in reality they may simply reflect changing sentiment or positioning. And that makes forecasting particularly difficult. Not only do we have to make assumptions about future milk production and consumer demand, we also have to estimate how much dairy was actually produced and consumed over the past few months. In other words, we are trying to predict the future without having a complete picture of the recent past.

Think about what that means for market participants. Buyers and sellers are making pricing decisions for deliveries three to six months into the future, while some of the fundamental data they need to support those decisions is already three months behind. That leaves them trying to assess a market six to nine months beyond their latest reliable data points. Quite a gap to bridge, especially in a market where sentiment can change three times in a single week.

GDT: A Forecast Into Sentiment

Today brings another GDT auction, a typical moment when the dairy market watches price movements closely and tries to draw conclusions about the balance between supply and demand. And that isn’t necessarily wrong. Prices, especially in C1 and C2,  do tell us something about the underlying market, but we think it is important to distinguish between what they tell us about today’s fundamentals and what they tell us about expectations for the future.

When nearby products trade at higher prices, it can indicate that buyers have an immediate need for physical product and that available supply is struggling to meet that demand. Prices further down the curve, however, tell us increasingly more about what market participants expect supply and demand to look like in the months ahead, and how they choose to manage the risks associated with those expectations. Both are valuable signals, but they don’t necessarily tell us the same story.

That is also why we like following the CME spot call market. In our view, it provides one of the more direct barometers of the immediate balance between physical supply and demand. When products are scarce and buyers urgently need coverage, that tends to show up quickly in the bidding and trading activity. And when supply is plentiful and buyers have little reason to compete for available product, the opposite becomes visible just as quickly. Of course, no single market tells the whole story, but we believe that actual trading activity in the nearby physical market often tells us more about current fundamentals than price movements further down the forward curve.

Our price expectations

With that in mind, looking at today’s GDT auction, we don’t expect too many fireworks. Starting with butter, we expect European prices to trade somewhere between €3,800 and €3,900, perhaps slightly higher, which would be broadly in line with the results of the latest tenders. What interests us more is how long New Zealand butter prices can continue to hold up. We increasingly hear that US suppliers are undercutting New Zealand butter in virtually all its key export markets, and we wonder how much longer that can continue without a more significant price correction. A sharper decline in New Zealand butter and AMF prices would make sense to us, although the market has so far been remarkably reluctant to move in that direction.

For Mozzarella, we expect a firmer result, potentially even challenging the highest prices seen this year. If buyers start competing more aggressively for available volumes, we wouldn’t be surprised to see a new yearly record. The European spot market has already moved higher, with prices reaching €3,700 and even a trade reported yesterday at €3,800. That certainly suggests there is some momentum behind the market, although today’s auction will give us a better indication of how much buyers are actually willing to pay.

On SMP, our readers know we remain very bullish, although we sometimes wonder whether our enthusiasm is getting a little ahead of ourselves and the market. The previous tender already delivered record-high prices, and we are not entirely convinced European SMP will manage to improve on those results today. That said, we are struggling to identify any meaningful weakness in the market either. For New Zealand SMP, we expect prices to move somewhat higher, although probably without a particularly aggressive increase.

Finally, WMP is a market where we would lean more towards another positive result. Prices have been moving higher over the past few GDT events, and for now we see little reason why that trend should suddenly come to an end. Of course, as we discussed earlier, trends can last considerably longer than most participants expect. And until the underlying balance between supply and demand changes, betting against them can be an expensive exercise.

Butter: Keep Ahead of the Bear Trend

Looking at the butter market, we continue to struggle to find a convincing reason why the downward trend should come to an end anytime soon. We understand why some market participants are starting to look for a bottom. Prices have fallen significantly, butter is trading at levels we haven’t seen in years, and historically, buying when everyone else is selling can be a very profitable strategy. But cheap doesn’t necessarily mean undervalued, and a market that has already fallen considerably can still have plenty of room to move lower. Especially when the fundamentals that pushed prices down in the first place haven’t really changed.

The biggest problem remains the amount of butter available. European stocks are exceptionally high, with StoneX estimating August inventories at roughly 42% above last year. And while milk production is starting to slow in parts of Europe, we shouldn’t forget the enormous volumes produced earlier this year. Even with stronger exports and lower imports, Europe is still carrying considerably more butter than it did a year ago. And the situation across the Atlantic isn’t much better. US butter stocks are also significantly higher, while production continues to grow. With American butter trading at a substantial discount to European and New Zealand product, US exporters are increasingly competing for the same customers. That makes it difficult to see how Europe can export its way out of the current surplus without prices remaining under pressure.

Another problem is that lower prices don’t automatically create more demand. Consumers aren’t suddenly going to eat significantly more butter, ice cream or pastries simply because wholesale butter prices have dropped. And with much of the Christmas demand already covered, the seasonal support that normally helps the market towards the end of the year is starting to disappear. Meanwhile, New Zealand is moving through the peak of its production season, and American suppliers continue to offer very competitive prices in international markets. So even if European production starts to decline, there is still plenty of butter looking for a home. And as long as that remains the case, sellers will have to compete on price rather than buyers competing for product.

What makes the current situation particularly interesting is the strength of the protein market. Normally, a sharp decline in butter prices would eventually put pressure on milk values, encouraging lower production and helping the market find a new balance. But this time SMP is doing much of the heavy lifting. With powder prices having rallied considerably, processors can still generate relatively healthy returns from milk, even while butter prices continue to fall. In other words, the strength of proteins is allowing the weakness in fats to continue for longer than we would normally expect. And that removes one of the mechanisms that would usually help put a floor under butter prices.

Of course, this trend will eventually end. Milk production could decline faster than expected, exports might surprise us, or buyers could decide that current prices are attractive enough to start covering significant volumes for 2028 allready. But even then, a temporary bounce isn’t necessarily the beginning of a new bullish market. With stocks expected to remain historically high well into next year, any recovery could quickly run into another wave of sellers looking to reduce their exposure. We therefore think calling the bottom in butter today is a brave strategy, and potentially a very expensive one. Those who get the timing right might eventually be rewarded handsomely, but those who get it wrong could find themselves waiting well into 2027, or even longer, before the market proves them right. And as we argued at the beginning of this update, trends have a habit of continuing much longer than most people expect.

SMP: We can't see the protein top

And while we struggle to find a convincing argument for a sustained recovery in butter, we have almost the opposite problem when looking at SMP. We keep asking ourselves how much further prices can realistically rise, but every time we look at the fundamentals, we find another reason why the market might not be finished yet. SMP has already rallied considerably over the past months, and naturally, more and more participants are starting to question how much upside is left. But what if €4,000 isn’t the ceiling everyone should be worried about? What if we are heading towards €4,500, or even prices we have never seen before? It sounds rather aggressive, and we fully understand why some readers might disagree. But looking at the current balance between supply and demand, we think the possibility deserves to be taken seriously.

The first reason is that milk production is starting to slow, but even more importantly, the milk that is available isn’t necessarily finding its way into SMP production. Cheese, milk protein concentrates and liquid skimmed milk are all competing for the same raw material, and in many cases processors can achieve better returns by selling their proteins elsewhere than by running their drying towers. We see this in the US, where milk production continues to grow while the combined production of NFDM and SMP has actually been falling compared with last year. So even if milk supply doesn’t decline as much as expected, that doesn’t automatically mean more SMP will become available. And that is a rather uncomfortable situation for buyers who are still waiting for prices to come down.

What makes us even more bullish is what is happening in the wider protein market. Over the past months, we have seen whey protein prices come under considerable pressure, and some participants have interpreted that as a sign that the protein rally is coming to an end. We would argue almost the opposite. With WPC80 having reached extraordinary price levels earlier this year, manufacturers started looking for alternatives, increasingly replacing whey proteins with milk proteins such as MPC. That demand hasn’t necessarily disappeared; part of it has simply moved from one protein market into another. And those milk proteins compete directly with SMP for the same skimmed milk. In other words, the weakness in whey might actually be contributing to the strength in SMP. Add to that the fact that SMP inventories are relatively limited, with no meaningful European intervention stocks available to cushion a shortage, and we have a market where even a relatively small increase in demand could have a disproportionate impact on prices.

And then there is the timing. New Zealand is approaching the end of its seasonal production peak, and several important importing regions are preparing for their next purchasing rounds. Southeast Asian demand remains relatively firm, Algeria is expected to continue to look for extra volumes, and buyers in Europe still have requirements to cover for the first months of 2027. None of these developments would necessarily be enough to create a price explosion on their own. But what happens when several of them arrive at the same time, in a market where producers have little spare product available and buyers have spent months waiting for a correction that never really came? We have seen how quickly sentiment can change when buyers realise they are not the only ones who still need coverage. And unlike butter, where sellers are competing to find a home for their product, SMP could increasingly become a market where buyers are competing to secure the volumes they need.

So yes, we think SMP prices could move well beyond €4,000, and we wouldn’t rule out €4,500 or even a challenge of the historical records in the first half of 2027. That would require several things to fall into place, and we are certainly not suggesting it is the only possible outcome. Higher prices will eventually discourage demand, American production could continue to increase stronger, and a stronger-than-expected European milk flush could change the picture considerably. But we find it interesting that the market seems so eager to call the top in SMP while the fundamentals are still pointing towards tighter availability. Perhaps the biggest risk for buyers isn’t paying too much today, but discovering a few months from now that today’s prices were actually rather attractive. And if butter has taught us anything this year, it is that a market doesn’t reverse simply because everyone thinks it has moved far enough. We wonder how many buyers are prepared for a scenario in which SMP does exactly the same thing, only in the opposite direction.

Final Note: Prices are not a good reason to expect trends to reverse

So where does that leave us? We have a butter market where almost everyone is looking for the bottom, and a protein market where almost everyone is looking for the top. Both have moved considerably, both seem increasingly uncomfortable for market participants, and in both cases there are plenty of people convinced that the next big move must be in the opposite direction. But markets don’t care how far prices have already travelled, how much money has been made or lost, or how badly someone needs a reversal. Ultimately, supply and demand will decide where prices go next, and until those fundamentals change, we see little reason to fight the direction in which the market is moving.

Of course, we could be completely wrong. Perhaps butter has already found its bottom, and perhaps SMP is much closer to its peak than we think. But we would rather change our opinion when the fundamentals give us a reason to do so than change it simply because prices have moved further than we expected. Calling a turning point makes for a great story, but getting the timing wrong can be an expensive exercise. And sometimes the smartest decision isn’t trying to be the first to spot a new trend, but having the patience to stay with the one that’s already there.

And finally, a big thank you to everyone who made it all the way to the end of this rather lengthy update. We realise we have given you quite a bit to digest, and probably a few things to disagree with. But that’s exactly why we write these updates. Not because we believe we have all the answers, but because sharing our observations, challenging assumptions and discussing different views helps us all understand this rather complicated dairy market a little better.

Trends tend to end. But until they do, they remain your friend.