Will Pre-Holiday Butter Rally Peter Out?

September 30, 2015 04:30 PM
Will Pre-Holiday Butter Rally Peter Out?

Last week, CME spot butter prices hit an all-time high, before giving back a large share of their recent gains this week. With the holidays just ahead, the question on industry analysts’ minds is whether the market has peaked and whether prices will continue to fall at this week’s rapid rate.

Last year, weekly average CME spot butter prices peaked at $3.058 for the week ending Sept. 26. This year’s average price for the same week of $2.9725/lb. was just shy of last year’s high—despite a new daily record high of $3.135 set Friday, September 26.

“The question now is whether the current butter rally will resume or whether the price has already begun its year-end descent. Last year, in the first week of October, the spot butter price fell 15 cents,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill. “However, there are differences between the 2014 and 2015 butter rallies.”

Ledman notes that last year the CME spot butter price hit $2/lb. in May, peaked at $3.06 on September 19, and retreated to $1.77 by October 28, before rising again. The market then traded within a narrow range, from $2.05 to the upper $1.90s, through November. The market fell in earnest on Dec. 16 to $1.61 and then closed the year at $1.555.

“By late January of this year, fears of drought in New Zealand were enough to entice end users of butterfat—who were still reeling from the previous year’s new high above $3 per pound—to obtain some level of coverage either through physical hedges or the futures market,” says Ledman.

After trading in a fairly tight range, the current butter price rally began on August 11, when the price broke $2/lb. While October and November butter futures had been indicating that spot butter prices would decline in October and November, they were not suggesting the drop would be as quick as it was in 2014—at least not until this week

“Several of this year’s butter price run-ups occurred as the cheese market was strengthening,” says Ledman. “But that was not the case with the recent rally.”

CME spot block and barrel cheese prices have traded below $1.70 for most of August and September. Then as the butter market moved above $2.50, Ledman notes, the cheese market fell below $1.70.

USDA’s Agricultural Marketing Service announced September milk prices on September 30. The Class III price fell 45 cents to $15.82, while the Class IV price dropped $2.18 to $15.08. October Class prices will be announced November 4. The October Class IV butter futures contract is calling for prices near $16.70, while October Class III futures indicate prices will be in the $15.45 range.

“Spot cheese prices need to rally above $1.70 to support October Class III prices, says Ledman. “Assuming that occurs, dairy producers in Federal Orders will likely be surprised at the price of butterfat and protein reported on their milk checks.”

If the October National Dairy Products Sales Report (NDPSR) prices for butter and cheese average $2.45 and $1.685, respectively, Ledman calculates that the Class III butterfat price will exceed $2.75/lb., while the protein price is less than $1.90/lb.

“If CME spot cheese prices fail to hit $1.70 by the second week of October, though, it is likely that Federal Order protein prices will be closer to $1.75,” says Ledman.


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