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Tuesday, November 07, 2017

Butter prices are udderly volatile!

By Andrew Woods  |  Source: USDA, RBA, ICS

Key points

  • The dairy market fits with commodity prices generally, with prices halving and doubling as the dairy market moves through its price cycles.
  • Dairy prices are quite volatile.
  • The current butter price cycles is a monster cycle with prices some 250% above recent cyclical lows (from August 2015).
  • Whole milk powder prices are currently going through a standard rising price cycle in terms of the size of the price rise.

2017-11-07 Dairy Fig 1

2017-11-07 Dairy Fig 2

Butter prices have been in the media lately, with low supply driving butter prices to high levels. This comes on the back of the woes of Murray Goulburn and the crash in milk prices in 2015. It raises the question of “How volatile are dairy prices?” This article takes a closer look at butter and whole milk powder price volatility during the past 16 years.

A couple of weeks ago Mecardo took a look at wool prices to see how they were travelling in relation to recent cyclical lows. This article uses the same methodology to look at price volatility, the extent of prices cyclical price rises and falls, for butter and whole milk powder. USDA export values for the Oceania region are used for these two commodities. The data runs from the mid-1990s onwards. As we are looking at price changes in relation to cyclical highs and lows in the preceding five years, the analysis is limited to the period from early last decade to now.

Figure 1 shows the butter price series (in Australian dollars per tonne) along with the change in the price from the high and low of the preceding five years. Somewhat surprisingly the butter price has been quite volatile during the past decade. In the lead up to the recent rise in price the butter price had three cycles where the price rose by close to 100% (effectively doubling) during the past decade. The intervening down cycles consisted of solid 50% falls from the cycle peaks. These are substantial price cycles, with the butter price trading in a ranged between $3000 and $5,500 per tonne. . The recent rising price cycle, however, is a big one with the butter price up by around 250%, peaking around $10,000 per tonne. This is on par with the monster cotton price cycle of 2011.

Figure 2 shows a similar analysis for whole milk powder. Whole milk powder is currently going through a fairly standard rising price cycle, with prices up by 70-80% from the previous cyclical low – very much like the merino wool market. The cycles of the past decade have been similar in extent to the butter price. Rising cycles have risen by around 80-100%, while falling price cycles have fallen by around 50% from cyclical peaks.

Mecardo also feature dairy future prices in our deciles page: Click here to view

What does this mean?

For consumers of bakery items which use plenty of butter, the volatile nature of the market suggests prices will revert back to more normal levels. That’s the good news. The analysis shows dairy product prices to be quite volatile, so in the absence of a change in market structure, the price volatility of the past decade is likely to continue, both up and down.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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