American Butter Institute Market Situation & Outlook

Third Quarter 1998
Volume 1, Number 3

Editor: Chris A. Nubern

Current supply and demand conditions in the butter markets continue to surprise industry analysts. Given that prices have been at such high levels for an extended period of time, many buyers and sellers expected the limited supply conditions to subside as over-quota butter imports entered the domestic market. With butter prices at the cash market setting new records on almost a weekly basis, supply conditions remain tight and the short-term effects of butter imports are uncertain. In this issue of the ABI Market Situation & Outlook, the current market situation is examined. Also, preliminary data on butter imports through June 1998 are presented. The discussion concludes with an analysis of butter price seasonality and the possible price outlook for the remainder of 1998.

Current Market Trends

Over time, all products display a relatively consistent seasonal pricing pattern. Structural adjustments in the market can result in changes in this pricing pattern, but market participants usually anticipate these changes. Consistency in the seasonal pricing pattern is the key to making effective long-term business decisions and managing day-to-day price risk.

Butter prices in 1998 started out relatively high compared to 1995 and 1996, and the market managed to go even higher. These price movements are somewhat inconsistent with recent price trends. In 1995 and 1996, market prices were very weak at the beginning of the year. There were some price developments in the market, but prices in both years were in the $0.80 range by the end of December. Although most people in the industry expected the butter market to remain firm during 1998, recent price levels and activity have shattered all expectations.

Grade AA butter prices have been trading above $2.00 per pound for over six weeks, a 125% increase over 1997 prices for the same time period. The market outlook is mixed. Prices are running up and no one seems to have a good explanation. In the eastern markets, supply of cream is tight and inventories are balanced to cover weekly needs. In some areas in the central and western markets, supply conditions are more favorable for buyers. Regardless of regional market conditions, the recent price increases have created a cautiously optimistic marketing environment. Many buyers are not willing to build inventories because of expectations of future price declines. Others are slowly building stocks because of a fear that current prices may be a bargain for at least the near future.

Alternative Supplies

The market remains unsettled and no one is certain about the future direction of the butter market. Because supplies remain tight - June butter production was down 10.5% from 1997 and year-to-date production is down 9% when compared to 1997 levels - the direction of the market in coming weeks will depend on the alternative supplies from the international market. Current price movements suggest that imports are not flowing into the domestic market as quickly as previously thought. Preliminary U.S. import data through June for butter, anhydrous milkfat, and butter substitutes are presented in Table 1.

Through June of 1998, imports of butter, anhydrous milkfat, and butter substitutes totaled approximately 7,905 tons (Table 1). This quantity of imports is about 13% higher than 1997 levels, which were estimated at 6,970 tons. Butter imports are increasing at a slightly higher rate than total milkfat products. Preliminary estimates show that total butter imports through June are 3,860 tons, a 28% increase over 1997 levels.

Although the preliminary data suggest only moderate increases in total milkfat imports, the import activity for the month of June has increased substantially when compared to 1997 levels. Table 1 illustrates that about 40% of the total imports of anhydrous milkfat and butter were received in June. For butter products, import levels for both quota and over-quota shipments are significantly higher when compared to June 1997 levels. For example, June quota imports for butter are estimated at 1,140 tons, an increase of about 110% relative to year earlier levels (Table 1). For over-quota imports of butter, the percentage increase is more dramatic (2,843%), but this is because over-quota imports of butter were at such small levels in 1997. For example, over-quota imports of butter in June 1997 were about 15 tons, compared to 454 tons in June 1998.

The preliminary data does suggest that international suppliers are responding to the historical price levels in the U.S. market. Although total import activity through June is only slightly higher than 1997 levels, increasing over-quota imports of butter are strong indicators of a properly functioning market. Because butter prices did not reach the $1.90 range until mid-June, expectations are that the July import data will indicate an even greater supply response from international sources. The question remains - "Are the international shipments a case of too little and too late?" Current strength in the butter market provides a preliminary answer to this question.

Butter Price Seasonality

A quick study of past seasonal price trends should provide useful information concerning the price outlook for the remainder of 1998. The analysis attempts to identify historic relationships between monthly average and annual average butter prices. If these relationships remain consistent, the outlook for butter prices should become more focused. Figure 1 illustrates the results of this seasonal price analysis for Grade AA butter.

For the past two years, price movements in Grade AA butter have distorted the seasonal price trend. For example, pricing data for both years clearly indicate that butter prices for the months of January through May are usually below the annual average. In 1996 butter prices in this time period proved to be about 26% below the annual average of $1.06 per pound. Again for the first five months of 1997, butter prices were below the annual average. In this instance, the difference was not quite as drastic, with only a 12% difference when compared with the annual price of $1.17.

For the months of June, July, and August, the results of the analysis are mixed for the last two years. In 1997, butter prices were below the annual average during this time period. Conversely, 1996 prices were well above the annual average. Considering the extreme price volatility during 1996, the seasonal price trend during the summer months is most likely misleading. The results for 1997 may be more representative of the butter market’s normal pricing patterns.

The seasonal pricing trends for the two years are consistent for September and October. The results of the analysis show that Grade AA butter prices have been above the annual average for these two months. For November and December, the seasonal pricing trends are once again mixed. The high butter prices in late 1997 are the likely source of this conflict.

Although the seasonal price analysis provides no clear indication of pricing trends over twelve months, there are enough similarities for the two years to warrant some general conclusions. For example, butter prices are usually at their low point for the year anytime from January through May. Prices climb during the summer months with the highest price levels being reached by September or October. Depending on marketing conditions, butter prices will also remain relatively strong for November and December.

If these general conclusions are representative of marketing conditions for the remainder of 1998, the butter market should begin bracing itself for even higher prices towards the end of the year. The only caveat is the increasing role of butter imports. As the Asian and Russian financial crises deepen, Australia and New Zealand could redirect some of their surplus stocks to the U.S. - possibly leading to falling butter prices.