By Ronald K. O'Brien II, President, North America for Nui Markets.

We're heading into a time when consumers will eat more butter than at any other time of the year. Most of it will be consumed as cookies, cakes, pies and other baked goods as we celebrate the Holiday season. While butter sellers have had the leverage this year, we currently find ourselves in a tenuous time for all companies involved in the global butter market.

CME Butter, after rallying for five straight weeks and hitting an all-time high of $3.5025 per pound on October 6, finally began to show weakness last week. It has since closed at $3.3975 as of Thursday, October 19. Reports indicate demand for butter is slowing, and cream multiples are peaking; however, it is still challenging readily available 80% salted bulk butter outside of the CME spot market.

The rapid rise in butter prices was driven by lower available supply due to both strong demand and weak milk supplies in key butter-producing regions. California milk production was down 3.7% in August compared to a year prior, which was slightly better than the July 2023 number, which came in down 5.5% vs the year prior. This was key, considering August U.S. butter production was 2.1% below August 2022 and 12.1% below July 2023.

According to the latest USDA Cold Storage report, butter stocks at the end of August were down 12% from the previous month, yet 4% higher vs. a year ago. According to analysts, the increased consumption may not actually reflect a higher use of butter per capita but rather the changes in buying patterns by restaurants and supermarkets needing to restock refrigerators.

According to the most recent USDA AMS reporting, "Overall, cream is tight in the West, but spot loads are available. Cream volumes above fulfilling contractual obligations gained some looseness in a few parts of the region recently. That said, some butter producers are limiting additional purchases of cream loads due to current prices". Some manufacturers are focusing production lines on keeping retail at full capacity, with cream volumes on the short end to hold both retail and bulk production at full capacity, making bulk butter availability tighter."

While near-term butter demand appears steady, there is concern that orders will slow down as holiday pipelines near capacity. Buyers are comfortable with hand-to-mouth purchasing but hesitant to take a longer-dated inventory position with prices around near-historical highs.

The market needs to incentivize production, yet butter manufacturers are worried about building expensive inventory with no ability to hedge future sales due to the backwardated butter futures forward curve.

Prices will likely fall further in November and December as more cream flows seasonally to the bulk churns. Given the recent demand trends and the volatility of butter prices, multiple credible market analysts anticipate volatility will remain elevated through year-end.

According to the October USDA WASDE report, "higher than expected butter imports in 2024 contribute to a higher fat-basis import forecast. Recent strength in butter prices and expectations of continued firm demand support an increase in the butter price for 2023. For 2024, price forecasts for butter were raised to $2.655 per lb. as price strength is expected to carry into the new year."

Companies we work with inside our Enterprise solutions can take full advantage of initiating sales allocation tenders or executing fixed price tenders to clear present and/or future supply. While Enterprise customers control every aspect of their digital environment, Nui Marketplace North America customers can initiate butter procurement tenders at either fixed or allocation-based contracts. Marketplace suppliers are then alerted of their requirements and specifications and counter inside of the procurement tender accordingly.

"Working with Nui and the unique index-linked trade feature is an innovative way for us to provide our customers with a steady supply of butter and offers them unparalleled control over their butter supply for 2024," says John P. Hvizda, SVP, Retail & Private Brand Challenge Dairy Products, a Nui Enterprise customer.

Even for the most bearish buyer, knowing you have your specific butter priced at the market gives you great clarity and lessens the basis risk volatility versus attempting to time the market. Taking advantage of the depressed current forward curve might provide a great opportunity to run fixed-priced or allocation tenders for next year, hopefully at lower prices. Or if you successfully run allocation tenders based on the NDPSR or CME indexes, you always have the ability to fix your upside price risk with CME or OTC-based Butter derivatives. Regardless, the process on the Nui platform is transparent, auditable and offers real-time market price discovery.

Let us grease the tracks for your 2024 supply or demand strategy.

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