Sunday, December 6, 2015

Butter Prices near Record Levels

November prices set records for the Federal Milk Orders paid on components.  Near record highs were achieved for butterfat.  Milk protein fell to lows not seen in over 10 years. Butterfat was priced at $3.18/lb., while protein was valued at $1.32/lb., and other solids were nearly worthless at $.04/lb.  The announced November pricing details can be seen by clicking here.  The dashboard of price movements is shown below.  The 8.8% gain in the price of butter has driven the value of butterfat up 9.4% and driven the price of milk protein down 22.4%.  Other solids showed a nice percentage gain, but it was against a very low base value for the prior month.

The current prices have lead to a very unusual makeup of the standardized Class III price.  Based on the November prices, butterfat made up 73% of the value for Class III milk.

Never in the history of the current pricing model has butterfat been worth 2.4 times the price of milk protein.  In prior posts this has been described as a pricing bubble.  In November, the price of butter increased to near record levels.  At the end of November, the Oceania (Asia/Pacific) price of butter  was $1.31/lb., and the European price of butter was $1.43/lb., both are about half the $2.80/lb. price of U.S. butter.  The price of butter is shown graphically below.  When butter reached a similar high about one year ago, the price fell quickly to near $1.50/lb.

The long term trends show the unusual crossing of butterfat and milk protein prices starting in September 2015.  Butterfat prices have been higher than protein prices for three consecutive months, and the spread between the two prices has grown each month. This has not occurred previously and will likely soon reverse.

Is this being driven by extremely low butter inventories or low production in the U.S.?

Actually, butter inventories were near record highs for the end of October.  October  butter production was near past levels.  New data for November inventory and production levels will be available soon and will be reviewed in an upcoming post.

The case for specifying this as a "butter bubble" seems very clear.  Butter is being imported at significantly lower prices.  Almost no U.S. butter is being exported, as the prices are not competitive internationally

Milk protein took a step drop in November, which was mostly due to the increase in butter/butterfat prices.  There are two components to the price of milk protein, cheese prices and butter prices.  As butter goes up in value, it reduces the value of protein.  When butterfat is worth more when used in butter than when used in cheese, the value of milk protein becomes negative.  In November, the high price of butter actually drove the butter component of the milk protein price formula into negative territory.

Cheese prices have remained fairly stable and the pricing contribution from the cheese price was stable.  Milk protein is down simply because butter is up.

Other solids remain at near zero value as the price of dry whey remains very low.  Other solids are priced based on the value of dry sweet whey.  Whey is an export product and is very much subject to the international market prices.

Overall, the Class III milk price was stable at $15.30/cwt., down just $.16/cwt. from the prior month.  As has been mentioned in prior posts, only the price of cheese has a major influence on the Class III price.  The underlying components that make up the Class III price are cheese, butter and dry whey.  Their influence is expressed in the formula below.  In 2015 butter prices started at $1.56/cwt. and are not at $2.80 /lb.  This has increased the price of Class III milk by only $.53/cwt.

Class III Milk Price = 9.6 x Cheese Price + 5.9 x Dry Whey Price + 0.4 x Butter Price - $3.20
(Numbers above are rounded for readability.)

More details are available on this formula in the April 23, 2009 post to this blog

The futures markets show similar patterns for all the commodities used to price milk.  Prices are expected to drop in the next two months, with strong recovery starting in February 2016.  Amazingly, butter is expected to stay in the $2.00/lb. range, well above the historical levels, but well below the current $2.80/lb.

The international markets continue to play a major role in determining the U.S. dairy prices.  The latest statistics on exports and imports will be available soon and will be analyzed in the next post.

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