Butter prices fell to a three-month low on the European Union cash market, and took above 20% their decline on the EEX exchagne, raising ideas that the rally which has taken prices to record highs is over.
“The butter bubble has been burst,” said Tobin Gorey at Commonwealth Bank of Australia, after European Commission data showed prices falling back below E600 per 100 kilogramme to per 100 kilogramme, their weakest since late July.
Prices at that level were down 9.9% from a mid-September high, according to the commission’s data, while values on the EEX exchange have fallen even more rapidly - plunging 7% on Tuesday to E5,383 per tonne for October delivery, a four-month low for a spot contract.
The drop also took to 23% the fall in values, on a contract basis, from a September high, taking the decline above the 20% threshold that is typically taken on financial markets as signalling a bear market.
‘Locomotive’ goes into reverse
“Butter prices, the locomotive of the dairy rally this year, plunged 9% or more in the past week,” said Mr Gorey.
“Butter prices have now fallen by about 20% in October.”
He added that “other dairy product prices are falling by substantially less but then nor did they make the astounding gains that butter prices did”.
The European Commission data showed skim milk powder falling 1.6% week on week to E160 per 100 kilogrammes, whole milk powder by 3.9% to E286, and edam cheese by 1.2% to E343, although cheddar cheese values held at E347 per 100 kilogrammes and emmental prices rose.
‘Most expensive in world market’
Indeed, the commission flagged in a reported that “EU average prices of dairy products generally decreased last month”.
However, it added that “EU [dairy] commodities are still the most expensive in world market.
“US is the most competitive region for butter, skim milk powder and cheddar, and Oceania for whole milk powder.”
In the US, butter prices averaged $2.53 per pound last month, a drop of 4.8% month on month, but still up 22% year on year, an industry report showed.
The dynamics have been reflected in the butter market by a 17.2% drop in EU exports of the fat in the first eight months of 2017.
Meanwhile, in the EU itself there are mounting reports of supply shortages.
Price growth stems from mounting demand for dairy fats worldwide, spurred by changing consumer preferences besides increasingly sizeable and wealthy populations, while output growth has stalled.
Besides a slowdown in milk production growth, the weak output reflects low prices of skim milk powder, which is also thrown off during butter manufacturing, meaning processors are often better off focusing on other products.
Indeed, one hope for butter bulls is that output of the fat looks set to remain pretty flat next year, according to initial estimates from US Department of Agriculture for the European Union and New Zealand, the big two exporters, and Australia.