Have Butter Prices Started Their Decline? Maybe Not

The newly announced Agricultural Marketing Service (AMS) prices for milk and components showed a decline in butter and butterfat prices.  Butterfat prices are primarily responsible for the 2022 high prices for producer milk.  In the October 2022 post to this blog, the fall of butter prices was expected in early 2023.  Has the decline already started?  This post will review the fundamentals behind butter and butterfat pricing to see if the decline has really started.

In October 2022, butter prices hit another record of $3.19 per pound.  In November, the price fell to $2.96 per pound.  The increase began in 2021 when butter prices were $1.36 per pound and steadily increased to the record October level (Chart I).  The weekly pricing levels reported by AMS show butter pricing increasing over the last four weeks.  The weekly pricing reports are consolidated at the end of the month and become the AMS price for that month.

Chart I - AMS Butter Price

The price of butterfat is mathematically linked to the price of butter.  The AMS price of butter is inversely correlated to the wholesale inventory levels of butter.  When there is a lot of inventory, prices are low.  When inventories are low, prices are high (Chart II).  

Chart II Butter Inventory and Price

So where do the butter inventories stand?  Chart III shows the cold storage inventory levels of U.S. butter.  In October, the most recent data available, inventories have continued their declines as shown by the red line in this chart. October 2022 inventory levels are 20 percent below the October 2020 levels.

Chart III - Butter Cold Storage Inventories

Inventory levels are primarily dependent on butter production matching domestic consumption.  Consumption has been growing, but production has been declining.  Chart IV is a six-year chart of butter production.  Butter production is cyclical and has been declining for two years.  For the month of October 2022, the monthly U.S. butter production was at the same level as the prior three years, about 161million pounds.  For most other months, production has been declining.

Chart IV - Production of Butter

California is by far the largest U.S. butter producer.  Over five years California has increased their U.S. market share of butter production from 29 percent to 34 percent.  

Chart V - California Market Share of Butter Production 

In September and October of 2021 and 2022 the California production levels of butter were almost even, indicating no year-over-year increase in production but also no declines (Chart VI).  

Chart VI - California Butter Production

Butter production in the rest of the U.S. shows a steady October volume for the last four years, but the overall decline is obvious (Chart VII). 

Chart VII - U.S. Butter Production Excluding California

The losses in U.S. butter production are coming primarily from states other than California and it is widespread.  That indicates that to recover inventory levels, U.S. butter production increases must occur in many locations in the U.S.  This will not happen quickly.

Domestic per capita consumption of butter has been on a steady rise for a long-time (Chart VIII).  Will the consumption levels continue to increase with higher prices?  There are two different thoughts on how this might play out.

1. One scenario is that butter is a very small part of the food budget.  Perhaps consumers will continue to buy butter and accept the higher cost.
2. The other scenario is that consumers will look for cost reduction in all grocery items including butter if they are struggling with inflated prices.

It is likely that there will be a blend of both scenarios resulting in only a small decrease in the growth of butter per capita consumption.

Chart VIII - Per Capita Consumption of Butter

Putting the puzzle pieces together, what is the mostly likely outcome?  It appears that even though AMS butter prices fell in November they may not fall again in the short-term.  Production issues have not been resolved enough to rebuild inventories.  The low butter inventories will take longer to recover and butter prices will continue to remain high in the near future.

This will be the last post to this blog in 2022.  Enjoy the holiday season and celebrate the new year that will hopefully bring cheer and prosperity to all.  New posts will be made in early 2023.

Dairy Inflation

The U.S. is suffering from extreme inflation.  Are dairy products contributing to the inflation?  If so, what products are contributing to inflation?  This post will examine how dairy retail prices have escalated and how that compares to overall U.S. inflation.  Most of the data in this post is based on the Consumer Price Index (CPI) and data from the Bureau of Labor Statistics (BLS).  It will also review the inflation in the Agricultural Marketing Service (AMS) prices for milk and milk components.

Chart I below shows the annual inflation rate for the Consumer Price Index.  The blue line is the increase of overall CPI, and the orange line is the increase of the Food CPI.  Annual inflation started growing in 2021 and accelerated to high levels in 2022.  Prior to that time, inflation was near to the target rate of two percent annually.  The overall CPI hit a high of 9.1 percent in June 2022.  The Food CPI climbed higher than the overall CPI reaching 11.4 percent in August 2022.  Since then, there have been some declines in the rate of inflation, but the inflation rates are still well above the two percent goal. 

Chart I - Consumer Price Index

U.S. dairy retail product price increases will be compared below to the CPI Food index.  The charts below are listed in the order of their increases from largest to smallest.  As prices increase, there is often price elasticity of demand, meaning that as the price increases, less will be purchased. Some dairy products like fluid milk are usually considered to have a very small price elasticity of demand as they are a must buy in most households.  Other dairy products are more likely to experience lower sales with higher prices.

Butter has seen the largest retail price increases (Chart II).  There are multiple reasons for this, but the fact remains that the retail price of butter has escalated tremendously reaching a 33 percent annual increase as of October 2022.  

Chart II - Butter price increases vs. Food CPI

Butter production is still below historical levels and inventories are continuing to decline. Butter sales have been increasing in recent years, but with the high prices there could be a decline in sales.  In the case of butter, there are alternative plant-based margarine products that have stood the test of time and are readily available in significant quantities.  Price elasticity of demand may come into play with butter.  As of October 2022, retail butter prices continue to increase.

Some of the issues that impact wholesale butter prices include production levels and wholesale inventory levels.  These variables have been covered in prior posts to this blog:  

May 7 - Butter, Butter, Butter

July 5 - Butter Up, Cheese Down

September 11 - Butter Production is a Problem!

November 6 - Are Producers Taking Advantage of High Butterfat Prices?

Fluid milk is the second in terms of the highest inflation increases.  The annual increase in fluid milk retail prices reached 20 percent in May 2022, double the CPI food price index in the same month. However, retail price increases for fluid milk are beginning to slow and are at 14 percent year over year in October 2022. This is still way above the two percent guideline.  Fluid Milk is a commodity and competition should keep prices in line (more on this below).

Chart III - Retail Price Increases of Whole Milk vs. Food CPI 

Cheese retail price increases are more in line with the Food CPI (Charts IV and V).  Cheddar cheese is a very important cheese to follow as the wholesale price of Cheddar is used to represent the overall price of cheese in the Federal Order formulas.  Production of Cheddar cheese and inventories of American cheese (primarily cheddar cheese) are at reasonable levels to support normal supply and demand.  In 2020 there were issues caused by the "stay at home" COVID polices that switched demand to and from retail groceries and food service.  Some of the 2022 annual increases are the result of the low 2021 Cheddar cheese prices.

Chart IV - Retail Price Increases of Cheddar Cheese vs. Food CPI

Retail price increases for processed cheese (Chart V) follow the same pattern as Cheddar cheese.  However, current price increases are somewhat greater than for Cheddar cheese.  

Chart V - Retail Price Increases of Processed Cheese vs. Food CPI

To answer the question in the introduction, "Are dairy products contributing to the inflation?" Charts II through V above all show retail dairy price increases at or above the Food CPI which is above the overall CPI increases.  Yes, dairy products are contributing to inflation.

Are the AMS dairy prices used to price producer milk also showing inflation?  The price percent increases in AMS data has risen faster than CPI figures for dairy products.  The higher prices paid for raw milk have helped cover the increases in feed and labor costs that are being experienced "on the farm."  

Butterfat, the biggest price bubble in dairy, has seen huge price increases in 2021 and 2022.  Month by month, the increases over the prior year have reached to record levels, more than doubling butterfat prices from two years earlier.  In January 2022, butterfat prices were 92 percent higher than the prior year.  The year-to-year increase has slowed down to 42 percent as of October 2022, which is still far above all other inflation numbers in this post. 

Chart VI - Percent Annual Increase in AMS price of Butterfat

Fluid milk retail prices have increased by a high of 20 percent in May 2022.  During that same month, the base Class I price for milk was up 53 percent.  The Federal Order formulas for Class I pricing are linked to butter, cheese, and nonfat dry milk prices, not retail milk prices.

Chart VII - Percent Annual Increase in AMS price of Class I Milk

Cheddar and processed cheese retail prices increased by a max of 13 and 16 percent (Charts IV and V).  Producer prices for Class III milk for cheese hit a much bigger increase of 48 percent (Chart VIII).   

Chart VIII - Percent Annual Increase in AMS price of Class III Milk

Yes, the producer price for raw milk is increasing significantly.

SUMMARY

The retail price of dairy products has increased by more than the food CPI which is higher than the overall CPI.  Dairy retail prices are adding to the overall food CPI increases.  The rate of retail price increases in dairy products is contributing to the extreme U.S. inflation currently taking place.

Producer revenue percent increases are also well above the retail price increases.