As I reported last month butter prices had been increasing and July 4th was going to be the tipping point for the summer. July 4th is when raw cream becomes scarce and sets the tone for the rest of the summer. This year there was available cream over the 4th of July weekend and cream has been more available this year than past years. That's good news..right?
Yes and No. Butter manufacturers would normally be buying this cream, converting it to butter and storing it, but only a few are doing that. Many are opting to resell the cream or produce butter for current needs. Butter storage in CME approved warehouses is 50% less than in the previous two years and at its lowest in 12 years for this time of the year. Exports are still strong, up 121% from last year for the same time period, and will remain that way until September when New Zealand comes back on line. Many butter manufacturers are worried that butter is at a price where domestic demand will begin to drop off and foodservice users will begin to use alternatives.
This has split the dairy industry into two camps; the export camp and the domestic camp. The export camp, made up primarily of California dairies, has taken the short term approach of selling the majority of their production on the international market, taking advantage of the higher international market price. This has left the domestic market short of product forcing some long-term customers to purchase for their needs on the CME, consequently pushing prices higher because of the limited availability of butter from the domestic camp. The domestic camp is more focused on domestic uses and needs. They are protecting their domestic customers and believe that the current price level is going to hurt long term demand for butter. They are not building inventories because they don't want to be caught with overpriced butter when the market turns.
Where does this leave us? Cream can be used in many dairy items, but primarily goes towards butter and ice cream. Ice cream production will begin to taper off in the next few weeks releasing more cream on the market. This will lower the cream multiples to a point where butter manufacturers will begin putting butter into storage. It will take some time for butter inventories to be replenished to a point where the markets are comfortable again. So I expect the markets to stay firm to higher over the next six - eight weeks.