Dairy Update

Was it Julia Childs or Erma Bombeck that said “everything is better with a little more butter?” Butter has certainly been the story for the last few months. McDonald’s move to using butter as opposed to liquid margarine was one driver of boosted butter sales, a move which has certainly driven up butter prices. This rise in butter prices has held Class III prices above $15/cwt and taken Class IV prices to over $16/cwt in the last few months. We have returned to the land where the “higher of” between Class III and IV is once again part of the conversation. 

This move has certainly caught several dairy analysts by surprise—including this one—as many of us were of the mind that prices would begin to settle in the last quarter as additional supplies came on board and most of the holiday purchasing was onboard.  

A little of that downward move has started to show up in the futures market, with the nearby contract off about 20 cents from contract highs. More alarming is the drop between December and January contract levels. With a gap of more than 50 cents per pound, it would imply a substantial drop in milk prices at the start of the New Year. Class IV prices on the board show a full $2/cwt drop between December 2015 and January 2016, reflecting that expected fall in butter prices.

Our strong butter prices have effectively killed any exports. Shipments are down 69 percent on a year-over-year basis through October according to the Agricultural Marketing Service. This recent collapse in butter prices may still have farther to fall as the gap between prices here versus Oceania or Europe remains more than 50 cents per pound.

Early months of 2016 are going to be a real stress on dairy farmers. Both Class III and Class IV futures prices are back down in the $14-14.50/cwt range, although they do show some strength back above $16/cwt in the latter half of the year. Milk supplies are now essentially unchanged from 2014 levels, with California production down more than 5 percent.  

It is going to take both milk production growth slowing down—if not stopping—and some additional demand pop—like another McDonald’s—in order for prices to move much above the levels suggested by futures markets. The potential is also certainly there that if California were to see some weather improvements leading to improved forage quantity and quality that their production alone could kill any kind of price rally.  

Unfortunately 2016 for the dairy sector anyway is shaping up to be another challenging year. Unless we can get Paula Deen a new prime time show…

Contact: Bob Young, 202-406-3620

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