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Futures markets reflect supply uncertainties
Wednesday, 10 June 2020
By Patty Clayton
Settled prices on European dairy futures markets improved significantly in the latter part of May. With some European countries starting to ease lockdown measures, there was a boost to demand as the hospitality industry prepared to reopen.
Prices on physical markets have followed a similar pattern, although they did not see the same uplift as on futures market.
The disparity is likely due to concerns by traders over future product availability. Product stocks are typically built up over the spring to offset lower production during the months of low milk production. However, strong retail sales, the use of Private Storage Aid and the risk to milk production from a potential drought across much of Europe could signal tighter availability in the autumn– leading to the bidding up of prices on futures contracts.
It remains to be seen whether product supplies will be sufficient to meet demand over the remainder of the year as markets open up again. It is difficult to predict the rate at which demand will return, given the potential impact of slower economic growth on incomes, changes to consumer buying behaviour and and the speed at which the hospitality industry can return to full capacity. On the supply side, it is not yet clear if production will be affected by dry weather over the summer or a potential squeeze on farmer margins.
With so many uncertainties surrounding dairy markets going into the second half of the year, prices are likely to remain volatile as traders react to short term changes to market balances.
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