It Must be Butter ’Cause Milk’s On A Roll
by Dave Kurzawski
Is capitalism still alive in this country? If you’re looking for an answer, look no further than your regional dairy farms.

The record-high milk prices of 2004 charged an entire agricultural sector with the fortitude — and funds — to produce more milk than ever before in history. And this surge of milk is flush with the butterfat you need at a price you can afford — at least for now.
I assume everyone would jump at the opportunity to pay $1.44 per gallon for gasoline. However, $1.44 per pound of butter carries a slightly different connotation: not bad for cream buyers, but not like it is for gas. While the five-year average monthly NASS survey announced price for butter is $1.44, the current year-to-date butter price average of $1.22 is substantially lower. Yet many buyers are waiting.
If you examine the fundamentals of the butter market, you can build a case for even lower butter prices. First, look at milk production. The USDA has reported that milk production rose a whopping 5 percent over last year; butterfat has risen two-tenths of a percent.
Year-to-date butter production is up 16 percent over 2005 and March butter inventory levels rose by an impressive 27 percent from previous-year levels. Still, butter price bulls could cite the fact that U.S. butter imports have declined by nearly 50 percent since last summer and January/February commercial disappearance of butter is up over 7 percent. This would be more of an argument if butter imports were significant to begin with or if commercial usage was up, say, 17 percent, but they’re not — and neither is the price of butter.
The butter futures market is really a price discovery mechanism. It anticipates, for example, certain events like a warm summer that would both slow milk and butterfat returns and perhaps increase prices. There is also a point at which government support comes into play. The risk-reward favors sellers as they see an end-point to price declines at $1.05. Buyers, on the other hand, have the advantage of knowing that if they buy cream at $1.20 butter equivalent they risk losing as much as 15 cents on their hedge. If they don’t, there is potentially $1 or more upside risk exposure.  
Cream and butter buyers need to buy when the price of butter is low — even if it seems prices could go lower. All too often, low prices give a warm sense of profit protection and lead to the common “if it ain’t broke, don’t fix it” mentality. It isn’t until everyone sees the same sign — maybe a surprising report that shows butter production is off by, say, 10 percent — that cream buyers get serious about forward pricing their cream. By that time, our anticipatory futures market is already in a strong advance.    
Just as prices can reflect a premium to the current spot market of butter, they can also reflect a discount. Much of the bearish news has already been factored into futures prices.
So the next time you are helplessly pumping $3 gasoline into your car, remember there is a price you can fix. It’s your business. How will you protect it?
Dave Kurzawski is an account executive with Chicago-based commodities brokerage Downes-O’Neill LLC.
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