This rally contradicts traditional supply-and-demand logic: despite year-on-year increases in milk volumes — roughly +5% in the EU, +4% in the US, and +2.5% in NZ — dairy prices have moved higher instead of retreating. Traders were positioned heavily short on the assumption that surplus milk would pressure prices downward, but that positioning has instead fuelled a short squeeze, especially in the butter market.

Each major dairy product has its own narrative within the rally. Powder markets (SMP) are climbing as stocks tighten faster than expected and replenishment lags, particularly outside of Europe where US nonfat production is lower and protein demand remains structurally strong. This limited availability has pushed prices far above recent lows, with trading volume climbing rapidly in early February.

Butter’s price surge has been driven primarily by positioning dynamics rather than fundamental shortages. Price moves triggered stop-loss orders among short holders, forcing a cascade of covering that amplified the rally. Butter markets remain thin in liquidity, meaning price moves can extend further and linger longer, especially with end users still hesitant to cover forward needs.