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October 28, 2016

Will Large Butter Stocks Stem Holiday Rally?

 |  By: Fran Howard

CME spot butter prices have been trending lower since mid-June, and with the year-end holidays just around the corner, it appears that a holiday rally will be short-lived and/or lackluster despite rising prices this week. Improving export potential, however, could soon lift butter prices and help drawdown current large butter stocks.

“Commercial disappearance during the holiday season is one factor that could play a significant role in the butter market this year,” says Sara Dorland, dairy analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. “Grocers are running more ads than a year ago and prices are also much lower than they were last year.”

According to Dairy Market News, for the week ending October 27, 6,122 stores ran promotional ads for butter, up 109% from same week last year. The promotional price for one-pound butter prints for the same week of $2.98 was 11% lower than last year’s $3.35/lb.

“The good news is that given the current domestic butter price, U.S. exports could be quite competitive at the start of 2017,” notes Dorland. “We could see a reversal in trade, with exports moving higher and imports declining. An increase in both domestic demand and exports would be instrumental in whether U.S. butter stocks return to average levels in 2017 or remain lofty into next year.”

Last year, CME monthly spot butter prices averaged just under $2.67/lb. in September, before dropping to just under $2.48 in October, then rising above $2.88 in November, and then finally dropping to just over $2.33 in December. Monthly average prices then continued to drop to just above $1.96 in March 2016. This year, by contrast, CME monthly spot butter prices have dropped from just under $2.18 in August to $1.995 in September. October prices have been even lower.

This year, there’s plenty of butter in cold storage. According to USDA’s latest Cold Storage report released October 21, U.S. butter stocks in September of 269 million pounds were 43.5% larger than the previous year and well above the five-year average for September of 184 million pounds. September stocks also were 36 million pounds above September 2013 stocks, the next highest year for September butter stocks.

“In 2013, U.S. butter exports had already started to increase by September, which helped reduce stockpiles that year,” recalls Dorland. The bright spot in the recent Cold Storage report, she adds, is that this year’s August to September drawdown was an impressive 15.6%, well above the five-year average of 9.4%.       

“It appears both futures and spot markets anticipated September’s weighty Cold Storage stocks as evidenced by the recent rapid decline in CME spot butter prices. From the start of September until last Friday, CME spot butter has forfeit 30.5¢ in value,” says Dorland. “Likely there is little concern among buyers that butter will be sufficient to meet holiday demand. It is more probable that market participants are now wondering when U.S. butter stocks will return to average levels.”

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