Butter, cheese prices follow other dairy product prices lower as holidays approach

by Ron Sterk
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KANSAS CITY — Butter and cheese prices that held while values for other dairy products plunged in recent months appear to have yielded even as the typically strong holiday demand season approaches.

Butter prices, which have been easing after showing remarkable resiliency most of the year, dropped more substantially last week. Prices at the Chicago Mercantile Exchange (C.M.E.) peaked at $1.77 a lb in mid-October, the highest since topping $2 in November 2004. Values dipped to $1.63½ last week, down about 6% since late September but still about 20% above year-ago prices.

Strong export and domestic demand "is coming to an end," Bill Brooks, an economist with eDairy Inc., said. With dairy production in Australia and New Zealand near its seasonal peak, supplies have increased and world prices have declined to the point U.S. butter prices are not competitive on the export market, he said. Tighter credit also has slowed global demand, he added.

Domestically, Mr. Brooks sees butter demand also suffering as consumers "trade down to cheaper restaurants" because of economic conditions. Higher-end restaurants tend to use more butter.

September butter production was 121,245,000 lbs, up 7% from a year ago, up 5% from August 2008 and the heaviest September outturn since 1943, according to the U.S. Department of Agriculture. Year-to-date butter production through September was up 9% from the same period last year, with the cumulative rate of increase declining monthly since May. Butter outturn in the first six months of 2008 was up 11% from the same period last year. In contrast, production in the third quarter was up only 3% from the same quarter in 2007.

Butter stocks, however, have dropped further below year-ago levels despite the heavy churning, indicating good demand at least through the first three quarters of the year. Stocks in cold storage on June 30 totaled 256 million lbs, 6% below June 30, 2007, the U.S.D.A. said. On Sept. 30 butter supplies in cold storage were 186 million lbs, 23% below the year-ago level.

Mr. Brooks noted that butter inventory draw down that typically begins in July started a month earlier this year, but use through the end of the year "would not be enough to support prices."

He also noted margarine already was featured at the retail level, perhaps reflecting the sharp decline in soybean oil prices in recent weeks, and possibly "sliding in front of butter," which likely will be featured closer to the Thanksgiving holiday.

Unlike butter, the cheese situation has been on the weak side, Mr. Brooks said. Third-quarter consumption saw "nice gains," but it was compared with lower numbers a year ago, he noted, and year-to-date consumption is below year-ago levels.

Prices for barrels and 40-lb blocks of cheddar cheese traded at the C.M.E. sank to 18-month lows near $1.60 a lb last week. Values were down 35c a lb, or about 20%, since late September and 65c, or about 30%, since setting record highs near $2.25 in late May. A year ago prices were near $2 a lb.

In its latest Dairy Products report last week, the U.S.D.A. said cheese production in September totaled 795,347,000 lbs, up 2% from a year ago but down 3% from August 2008. Year-to-date cheese production was 1.4% above the same period last year, with the cumulative rate of increase growing monthly since April. Cheese stocks in cold storage on Sept. 30 totaled 905 million lbs, up 2% from a year earlier.

Although some increased buying was noted by the U.S.D.A. at recent lower price levels, buyers generally are concerned that economic conditions could dampen holiday cheese demand late in the year.

This article can also be found in the digital edition of Dairy Business News, November 2008, starting on Page 14. Click here to search that archive.

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