Sunday, October 4, 2015

Butter Bubble

September 2015 Class and Component Prices show significant component pricing volatility.  The Class III milk price was down only 2.8% to $15.82/cwt. on relatively stable cheese prices.  However, the volatility of prices for butterfat and milk protein was very large, with protein down 22.9% and butterfat up 21.4%.  This was driven by a huge increase in butter prices, which were already at high prices.  Other Solids become almost worthless with a 59.6% plunge to five cents per pound.

This has really changed the pie chart of component pricing as shown below.  Butterfat contributed 61% of the value to the September Class III price.

These prices vary significantly from the long-term trends with butterfat becoming significantly more valuable than milk protein.  Butterfat was valued at $2.75/lb. and milk protein was valued at $1.98/lb.

The high price for butterfat was based on a spike in butter prices to $2.44/lb.  The chart below shows the relationship between butter and butterfat prices.  The futures market is currently showing butter prices at $2.57/lb. for October.  If this figure holds, it would drive butterfat prices to $3.33/lb., the second highest price every recorded.

The very high butter price has driven the milk protein price down to $1.98/lb., which is one of the lowest prices seen in the last ten years.  The price of milk protein is driven by two factors; the price of cheese and the price of butter.  As cheese goes up in price, the price of milk protein goes up, but the price of butter has an inverse relationship.  As the price of butter goes up, the price of milk protein goes down.  This formula gives value to milk protein for increasing its value because butterfat is typically more valuable in cheese than in the form of butter.  For the first time since 2001, butterfat is currently worth more in the form of butter than cheese as shown in the chart below.


The current U.S. price for butter is nearly twice the international price.  As mentioned in the prior post, the U.S. has become a net butter importer as imports are outweighing exports.  Also, over the last three years, butter churning has been decreasing.

This has kept butter inventories in line, but there is no inventory scarcity that would typically increase prices to record levels.  

With all these facts in mind, it seems inevitable that butter prices will take a tumble very soon.  The futures market is showing a 20% drop by year-end 2015.


What is the good news?  The most important parameter for the Class III milk price is the price of cheese.  At least for now, the price of cheese is holding.  

However, as reviewed in the prior post, the U.S. is beginning to see cheese imports increase as less expensive cheese blocks and barrels are available on the international markets.  Significant new imports are coming from New Zealand.

This is impacting inventories.  And, as the inventories rise, price deterioration begins.

The futures market is not showing any weakness at this time with stable cheese prices predicted for the next year.  This also seems unreasonable as the underlying factors; the Russian embargo on dairy products, lower China dairy purchases, exchange rates, and lifting of the European dairy quotas, show no suggestion of changing.  Production of cheese continues to expand in the U.S., but the current rates of growth in production exceeds expected increases in domestic disappearance.  YTD, cheese production is up 2.5% over 2014 and for the month of September production was up 3.5% over the prior year.

As reviewed in the prior post, cheese exports are down considerably and cheese imports are at record levels for this time of the year.  With no change in direction of these analytics, inventories can expect to rise and prices drop.


Other solids are valued based on the price of dry whey.  Dry whey is an export item.  In posts through 2013/4, other solids were identified as a new source of revenue for the dairy producer.  Today, other solids are essentially worthless.  Other solids were delivering $2 to $3 dollars to the class III price.  In September they delivered $.26.  The cost to dry whey and package it removes what value there is for dry sweet whey.  Improved pricing for dry whey will probably be slow and minimal, as global conditions will not quickly change. 


The items reviewed above include a price bubble for butter, a potential drop in cheese prices, and a sustained lower value for other solids.  The most important item for the Class III milk price is the cheese price.  Efforts to help maintain the value of the Class III price should focus on cheese.  All aspects from production, exports, imports, and domestic consumption can influence the domestic U.S. supply/demand forces.

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