The Market Tension Index
Our Dairy Trade Simulator (DTS) contains a monthly Market Tension Index (MTI) which has been derived from estimates of historical and projected future commodity ingredient (SMP and WMP) stocks in the hands of major global dairy exporters. Our analysis shows the MTI has been a reasonable forward indicator of dairy product spot price levels. The MTI is contained in our Global Dairy Directions.
The MTI represents a relative measure of market tension, effectively an inverse index of the total estimated ingredient inventories in the hands of major dairy exporters. The index was set at 100 in January 2013. This specific data was selected as milk powder spot prices were near long-term average values, and valid reference points were available across country/product combinations.
The higher the MTI, the greater the market tension and shorter the supply of commodity ingredients. When exporter stocks are high, the tension index is low. The rationale for this is that over time any surplus or shortage in milk availability will show up in changes in powder inventory volumes.
The Relationship between the MTI and Spot Prices
There is a close relationship between the historical MTI and observed spot prices. We have explored historical correlations between the MTI and spot prices, as well the extent of any lagged effect impacts.
Our work shows a historical 93% correlation between the MTI and the 6-month lagged Oceania weighted-average spot price, where the weighted-average spot price is derived using the annual global export mix and monthly spot price quotations for the main 4 dairy commodities – WMP, SMP, cheddar and butter.
Projected commodity values
Leveraging the scenario analysis capability of the DTS, we developed an analytical framework for providing Oceania and Europe monthly fundamental value projections. This framework provides a clear linkage of factors affecting net trade to projected prices for each region-product combination.