June 23, 2017

Dealing with Motivated Buyers

 |  By: Mike North

One of the most basic principles in establishing a market is that you must have a buyer and a seller present for a market to exist.  Without one or the other, a market cannot be made.  For many years, we have operated under the premise that “I produce milk, therefore someone must buy it”.  While most of the time it is possible to find a willing buyer, it is not always possible to find a motivated buyer.  And there is a difference.

Since early this year global buyers of butterfat have been seeking out product.  European butter prices began to close the gap with U.S. prices as early as last spring.  In the time preceding that, and even in the months that would follow, stronger U.S. prices and abundant European inventories allowed for the flow of butter into the United States.  As European inventories have been whittled down to more uncomfortable levels in recent months, prices have climbed further, taking Oceania, and most recently, U.S. prices with it.

The race for fat is on.  Prices have responded.  Buyers are motivated.  And producers now face an opportunity that has not been present since 2015.  At the time of this writing, spot butter markets have moved north of $2.70/lb.  The first time this happened was in 2014 and then again in 2015.  In each of those moves, prices were met with resistance at both the $2.90 and $3.00 levels.  In 2014, we spent five weeks rising above $2.70 to establish the peak.  In the five weeks that followed, the market dropped $1.26/lb to move to $1.80/lb.  In 2015, we spent one week above this level before correcting 79 cents.  In an encore performance that same year, prices rebounded to establish a 6 week campsite at approximately $2.90/lb.  When the camping trip was over, the market fell 90 cents in two weeks.

So here is the question we are faced with.  How do we manage a market that is known to stay for only a brief time at such high levels?  Simply put, you move toward the buyer to manage prices while they are still moving in your direction.  Waiting for the top to be established and then chasing a lower moving market is often an effort in futility.  This is no different than asking a girl to the prom.  It is too late to get her to commit when she is already running away from you!   Begin the conversation now to establish price risk management strategies at levels that are among one of twelve weeks in history.