Despite sideways and range bound cheese and nonfat dry milk prices so far this year, butter price has performed very well. Butter price began the year at $1.5550 moving to a record high of $3.1350 in late September before falling back only to find renewed buyer interest recently with price seemingly headed for $3.00 again. It is interesting to note that the current average retail price last week was $3.08 per pound while one year ago the average price was $3.82 per pound. Current spot butter price is $2.8850 while spot price was $2.00 per pound one year ago. It is not logical. The question that is being asked is, “What is keeping spot price so strong in light of current fundamentals”? That question is not easily answered. There are many factors in play which need to be considered. It is clear bullish factors outweigh bearish factors at present.
This is a high demand time of year with the majority of butter used in the course of a year moving during the fourth quarter. The advantage butter has over cheese is that is can be fresh or frozen with little change in consistency. Supply can be purchased earlier in the year and then stored until a period of high demand. There is no aging program for butter or consumers that prefer aged butter. There are types of butter as far as salted or unsalted and there are various flavors added to butter for better appeal in certain applications.
Butter demand has been termed as good throughout much of the year and has kept buyers active and price trending higher. Manufacturers have been effective in limiting production in order to keep supply in line with demand for the most part. This strategy had been used very effectively last year and one that resulted in record price. This has again been implemented this year which has again resulted in record price. This strategy somewhat feeds on itself as the higher price goes the less manufacturers are willing to produce extra supply. They do not what to risk having uncommitted supply in the event price falls. So, the higher the price, the less likely production will increase in essence creating a sell-induced shortage.
The risk to this is what has been seen much of this year which has been a result of the record price last year. Export market share is lost as international buyers turn elsewhere for supply. Butterfat exports in September totaled 665 metric tons, the smallest export figure since July 2009. Year-to-date exports of butter are 71.7% below the same period last year. This includes the 25.671 million pounds of butter CWT has assisted with exporting. Butter price in July 2009 hovered in the $1.20’s. Much has been accomplished to increase export demand for U.S. butter since that time, but that has all been lost at the present time and export demand is difficult to rebuild very quickly unless there is a shortage elsewhere. Low world price may improve this over a shorter period of time if indeed New Zealand continues to reduce milk production as farmers turn back to more traditional methods of farming in the attempt to be profitable. However, the question is, “How much of the decrease of dairy production is New Zealand will be filled by Europe”? Europe has not been able to export to Russia and will not be able to for much of next year unless something changes.
U.S. butter price is currently about $1.71 over the latest Global Dairy Trade auction price an uncompetitive in the world market place. Butter imports have exceeded the trigger point causing the Foreign Agricultural Service administrator to impose higher tariffs on incoming butter. Yet even with all of this, price reached a record high and still remains strong. This has certainly been good for Class IV milk price with the October base price reaching $16.43 and the highest price of the year.
There is fear of repercussion to all of this once holiday demand is satisfied. Buyers will not want to build inventory at a high price and with very limited export business, supply could build rapidly. There may then be only two alternatives. Either consumer demand will need to remain strong and keep buyer interest steady and price supported or price will need to decline in order to stimulate demand. We may see a repeat of last year when butter price declined substantially through the end of the year.
-World Agricultural Supply and Demand report on November 10
-December Federal Order Advanced Class I price on November 18
-October Livestock Slaughter report on November 19
-October Milk Production report on November 19
-October Cold Storage report on November 23
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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