October 9, 2017

Is Butter Headed to $3?

 |  By: Robin Schmahl

The butter market has been a bit of a surprise in that price is not higher than it currently is. In fact, butter prices have been in a downtrend since early August falling from a price of $2.7375 to the price of $2.34 as of October 6th. It is unusual because this is the time of year when demand increases significantly which is reflected in price. Retail and food service industry buyers are active with price generally increasing into September or October before settling back somewhat.

In 2014, butter price reached a record high in September before falling back. In 2015, the pattern was similar with a price increase to another record higher in September before falling back in October.  Last year, price increased in June before falling back only to bottom in October and trend higher through the end of the year.  

This year, price trended higher during May, June, and July before reversing trend in early August. The question is whether the market will follow a similar trend as previous years. Some expected the butter price to reach $3.00 before the end of the year and, although that is certainly possible, it seem to be a bit of a stretch at present. We do know butter price can move substantially in a short period of time when buyers become aggressive.  

U.S. butter is competitive in the world market with the latest Global Dairy Trade auction, posting a  price of $2.65 per pound compared to the U.S. price of $2.34. International interest has increased due to this competitive price and available supply. Butter is tight in the European Union with Western European butter being quoted around $3.13 per pound and Eastern European butter quoted around $2.95 per pound. UK supplies are very limited with reports that some buyers still need supply for end of the year holidays. Interestingly, European butter futures are being quoted and traded nearly 2,000 euros per ton lower for the second quarter of 2018. This is an anticipation of demand either being significantly affected or the potential for butter production to increase, or maybe a bit of both. Higher prices cure higher prices and this could be a classic example if it comes to fruition.

Higher prices in Europe seem to be helping U.S. exports with August butterfat exports 177% than a year ago with volume reaching 2,652 metric tons. This puts butterfat exports so far this year 12% above the same period a year ago. Canada has been the largest importer taking 4,178 tons during the June through August period. This was more than three times the volume they imported last year during the same period.

There are still three months of the year during which butter price can move substantially. But the current market and the stronger prices we experienced earlier in the year does suggest that buyers were more aggressive to procure supply earlier rather than later. This could be one reason buyers have not been as aggressive in the spot market. Along with that, some manufacturers have been selling excess inventory in order to better manage supply. That has been bringing quite a few loads to the daily spot market allowing buyers to purchase at lower prices.

U.S. butter inventory is declining and the rate of that decline will determine the strength of price. If supply continues to remain available, buyers will not be concerned over supply. If inventory declines substantially, buyers may become more aggressive in their desire to make sure they have enough supply for current orders and expected demand.

Butter may not have quite the influence on Class III milk price as it does for Class IV, but it does have an influence. It also makes a difference as far as utilization depending on the area of the country. Historically, butter has been the leader of cheese prices many times, but that has changed over the past few years. Each product seems to run by its own fundamentals. Years ago, butter price moved very closely and remained close in price to cheese and thus this pattern was more credible. However, butter price has been substantially higher than cheese prices for quite some time changing this market relationship and pattern.