Buyers have been burnt by butter twice in a row now. The CME spot butter price rallied to nearly $3.27 per pound in early October of 2022 due to weak production and some retailers who were short on butter for year-end sales.

Improved production in early 2023 helped to push the price back down in the first half of the year, but a rebound in domestic demand pushed the price to a new record high above $3.50 in early October of 2023. End users we talk to don’t want to see their purchasing budgets blown up for a third consecutive year and they are looking at tools that would allow them to lock in the cost of their butter (or cream/milk) for the second half of 2024 right now.

Production and consumption

To understand what has happened in the butter market the past two years we need to look at the seasonal pattern of production and consumption of butter. Milk production trends higher over the winter and into the spring, which results in surplus milk that gets turned into storable dairy products like cheese, butter and milk powders.

As the weather warms up and the cows become uncomfortable, milk production drops in the second half of the year and butter production drops, too. At the same time, the strongest months for consumption are November and December during the year-end holidays. As a result, there is a pretty stark seasonal mismatch between production and consumption of butter that can lead to very volatile butter prices in the second half of the year.

The price spikes in 2022 and 2023 were driven by different circumstances. In 2022, we started the year with weak milk (and butter) production, which helped to keep the price of butter high. Everyone (especially retailers) had reluctance about locking butter volumes and prices at mid-year because the expectation was that production would increase and prices would come down. Instead, butter production turned out weaker than expected in Q3 and retailers had to scramble to buy enough butter to match year-end holiday sales, which pushed the market to new record high prices.

Lessons learned?

It appears retailers learned from their experience at the end of 2022 and they were more aggressive in purchasing butter mid-year during 2023. Maybe even too aggressive. Retail orders have been strong enough that butter makers have been very focused on producing retail packaged butter at the expense of bulk butter (25 kg or 68 lb blocks) production. Only bulk butter can be traded in the CME spot market. The result was a new record high for the CME spot butter price again in 2023.

So the butter market rallied in 2022 because retailers (and others) didn’t lock in enough product ahead of the holidays. In 2023, they locked in plenty of product and left the bulk market tight. What happens in 2024? It’s not clear. It’s unlikely butter will rise above $3.00, but few people expected that in 2022 or 2023 and the market still ended up there.

For those who want to manage their butter (or cream/milk) price risk, the CME offers a suite of futures products tied to dairy prices. As of writing this (early November), the futures for butter covering the second half of 2024 average a little below $2.50 per pound. Actual prices might average lower than that during the second half of the year, but for those who absolutely do not want to experience butter over $3.00 next year, locking in $2.50 butter now is possible.

Editor’s note: This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of StoneX Financial Inc. (“SFI”) or StoneX Markets LLC (“SXM”). SFI and SXM are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Contact designated personnel from SFI or SXM for specific trading advice to meet your trading preferences. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by SFI or SXM.

– Nate Donnay is the Director of Dairy Market Insight at StoneX Financial Inc. and has been applying his expertise in large complicated systems and statistical analysis to the international and US dairy markets since 2005.