The problem is bulging inventory. Butter stockpiles stood at 322,219,000 pounds at the end of August, according to the U.S. Department of Agriculture, up 52% from a year ago and hovering near a 23-year high.
“We’ve got too much butter, that’s clear,” says Tom Bailey, executive director for dairy research at Rabobank in New York. “We’re seeing prices coming under pressure. It’s now more of a buyer’s market.” Investors who want to bet on butter prices can invest in futures traded on the CME, though it’s worth noting that the speculative market for such contracts is small. The stocks of producers such as Dean Foods (ticker: DF) or Switzerland’s Nestlé (NESN.Switzerland) offer some exposure, but neither depends heavily on the commodity. The most direct benefit for individuals may come in the dairy aisle, where analysts expect more promotional discounting in the months ahead.
Bailey says U.S. processors ramped up production and diverted resources from other dairy products in response to rising demand for butter. “The ‘fat is back’ mentality basically drove prices for the past couple of years to record high levels,” he says. “Butter’s kind of trendy; hence, we have high prices.”
Diet-conscious consumers for years eschewed high-fat dairy products like butter, opting for low-fat alternatives such as margarine, low-fat yogurt, and skim milk. But recent research has questioned the conventional wisdom about fats. A slew of studies have expounded the benefits of a diet that includes full-fat dairy, such as protecting against diabetes.
That has helped drive U.S. butter consumption to its highest level in decades. In 2012, Americans on average ate 5.6 pounds of butter, according to data from the American Butter Institute, marking a 40-year high.
The food industry has joined in. In 2015, McDonald’s said it would begin using real butter in Egg McMuffins instead of liquid margarine, as part of a turnaround effort focused on shifting consumer tastes. Retail sales of butter have risen 6% over the past year, to $2.87 billion, while margarine sales have fallen 7%, according to market-research firm IRI. However, Bailey warns, “Demand isn’t growing fast enough to compensate for that supply growth.”
Spot butter prices recently dipped below $2 for the first time since early April, and Bailey expects prices will remain under $2 for the next three quarters as inventories clear out. Dave Kurzawski, a senior broker at commodities brokerage INTL FCStone Financial, thinks U.S. prices could fall below $1.75 a pound in the next few months due to the high stockpiles.
Butter inventories, meanwhile, have barely budged, falling 3.2% in August from the prior month. That’s well below the average 11.5% decline in monthly butter stockpiles reported in the past five years, according to INTL FCStone.
“U.S. butter prices have defied gravity for a long time,” says Kurzawski. “The weight of the inventory is finally starting to impact prices.” Seasonal increases in demand at Thanksgiving and Christmas may support butter prices, but New Year’s resolutions will revive the downward pressure.
Source: Barrons
Link: http://www.barrons.com/articles/the-bear-market-in-butter-1475301057