June 1, 2017

Why Are U.S. Butter Prices Soaring?

 |  By: Fran Howard

The global market has tightened and U.S. producers are now in a prime position to start meeting the needs of world consumers. Over the past month, the CME spot butter price climbed nearly 13%, from $2.09.25 on May 1  to $2.36  on May 31, and butter futures prices have pretty much followed suit, yet U.S. prices are still competitive on world markets.

“While there may not be overwhelming domestic data to support May’s dramatic appreciation of CME cash-settled butter futures and spot prices, there are concerns overseas that could help explain the recent eruption in U.S. butter prices,”  says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

The European Union, the world’s largest milk-production region, is also one of the world’s top suppliers of butter, but butter production has been declining in the region. In the EU-28 (excluding Denmark), butter production plunged 5% in the first quarter of this year, compared with the same period in 2016, according to Eurostat data.

At the same time, European butter exports have also declined. “It appears Europe could be reducing exports to hold product for internal use later this year when demand for butter peaks seasonally,” Dorland says. EU-28 butter exports for first-quarter 2017 of 44,403 metric tons (MT) sank 24% from the prior year after adjusting for leap year, according to Global Trade Information Systems (GTIS) data.

Now that European export supplies of butter are tight, buyers will have to rely more heavily on New Zealand, Dorland notes, but New Zealand’s primary focus is to  produce whole milk powder (WMP). However, given current butter prices—already at historical highs in New Zealand—there is an incentive for the country to pull milk away from WMP and put it into butter, she adds.

Looking at butter importers, several of the world’s top 10 have reported first-quarter import volumes. While the aggregate data looks mostly unchanged, Dorland notes that, coupled with constrained supply, even steady demand can still cause prices to move higher. One country, however, has been notably active in the world butter market.

“Russia has quietly regained the top spot for butter import volumes after several years of depressed imports,” Dorland says. In the first quarter of this year, Russia imported 24,883 metric tons of butterfat, which was up a strong 16% from first-quarter 2016, after adjusting for leap year. While most of Russia’s butter imports came from neighboring Belarus, Russia also imported more than twice as much  butterfat from New Zealand in the first quarter of 2017 than it did in the first three months of last year.

It appears that the global butter market is tightening, and that importing countries could be turning to the United States for butterfat, which helps to explain the rapid run-up in CME butter markets in May, says Dorland.

“It appears both Europe and New Zealand have a limited amount of butterfat for the global market, and that global buyers who are hungry for butterfat are now looking to the United States to meet their needs,” says Dorland. With nearly 300 million pounds of U.S. butter in storage, the United States is in a good position to begin filling those needs if butter manufacturers are willing to use fresh milk to produce butter with 80% fat for the world market.