Dairy pros: record butter stock = buy/sell opportunity

by Laura Lloyd
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DELRAY BEACH, FLA. — Jerry Dryer, editor of the weekly newsletter Dairy and Food Market Analyst, sees a startling opportunity for both buyers and sellers of the currently record inventory of frozen butter in U.S. commercial cold storage.

He said the roughly 320 million lbs currently stockpiled may have recently set a floor at about $1.42 a lb after recently moving up 4c a lb. Domestic end-users, he said, should take advantage of the favorable pricing and get some longer term coverage of their needs for butter.

Mary Ledman, a principal in the dairy economics consulting firm of Keough Ledman Associates in Libertyville, Ill., and editor of the Daily Dairy Report, also emphasized the current buying opportunity.

In addition, sellers of butter also have an excellent opportunity to export their supplies, Mr. Dryer added. He pointed out that the Europe Union currently has almost no frozen butter on hand and no reliable exporters of butter other than the United States. Sales to the European Union, though, require U.S. butter producers to change their formula to suit the European market, which means unsalted butter with an 82% butterfat content (butter for the U.S. market is typically 80% butterfat and salted). New supplies of heavy cream in the United States may be made into butter for sale to Europe while domestic demand would come out of the stockpiled inventories, helping to draw them down, Mr. Dryer said.

He contended that the only obstacle to this scenario was inertia on the part of U.S. butter manufacturers who may be dragging their feet about reformulating for export to Europe. But he added that U.S. butter producers have gone this route “three or four times in the last 15 years,” so it wouldn’t be a totally unfamiliar strategy.

He said the profit potential ought to be a great incentive. “Butter is $2.40 a lb in Europe and $1.42 in the U.S.” on a wholesale basis, he said. In his opinion, the only other possible exporter of butter to Europe is New Zealand, but he doubts they have sufficient supplies on hand to do much export business right now.
U.S. per capita consumption of butter has increased from 4.5 to 5.2 lbs per person, noted Ms. Ledman. She said only once in the past five years has wholesale butter not exceeded $1.50 a lb during the second half of the year. Butter prices may fluctuate significantly on a seasonal basis, such as when fall baking typically translates to higher butter sales and prices.

The current low-price conditions are not likely to last for a lengthy period of time. Other factors may push butter prices up, Mr. Dryer said. Weather, such as the current extreme heat in leading dairy state California, could unfavorably impact the output and fat content of new milk supplies, sending butter prices back up.

“We could see $1.80 to $1.90 butter this fall” if severe heat continues in California’s San Joaquin Valley, he said. Cows subjected to excessive heat produce less milk and less fat in their milk.

He added that, even though frozen butter in commercial inventory is at a record, the supplies, primarily in storage in California and Wisconsin, would cover only 55 days if no new butter was created.

The conditions that created this record inventory, Mr. Dryer said, involve both temporary and possibly permanent factors. A short-term negative for the consumption of milk fat this summer has been the cool, wet weather across much of the nation that has kept a lid on ice dream demand.

What may constitute a long-term trend favoring ongoing surplus butter supplies is the manufacture of Greek yogurt, a popular offering on grocery shelves that requires significantly more milk to create than traditional yogurt.

Mr. Dryer said low-fat and nonfat Greek yogurt needs 3 lbs of milk to make 1 lb of yogurt, leaving “more fat for the churn” than traditional yogurt, which uses 1 lb of milk to create 1 lb of yogurt.

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