What does the Medical Community Favor, Butter or Margarine? What impact has the Ukraine had on Margarine prices?

Margarine is built on a mixture of plant-based oils.  The most often used oils are soybean oil and palm oil. The retail price of margarine has increased faster in 2022 than the price of butter.  Margarine prices grew at 31 percent and butter prices grew at 22 percent in 2022.  Comparing January 2022 to January 2023 the margarine price grew by 45 percent and butter prices grew at 26 percent (Table I).  Sales of butter and margarine vary over time.  When partial hydrogenation was linked to increases in trans fats, margarine sales dropped, and butter sales picked up.  When margarine processors quit using partial hydrogenation, margarine sales picked up. When it comes to taste, butter is the clear winner.  When it comes to price, margarine is the clear winner (Chart I).

Table I - Percent Increase of the
Price of Butter and Margarine

Chart I - Prices of Butter and Margarine

In the prior post, the pricing of butter was covered in detail.  Margarine will be explored in this post.

PRICING

The price of butter increased to record highs based on shrinking inventories in cold storage.  There is currently some inventory recovery and wholesale prices are now dropping.  Margarine prices escalated due to a global shortage of plant-based oils resulting from the huge drop in plant-based oils from the Ukraine.  Prices of margarine are lower than butter prices and at a time of escalating food prices with inflation, some shoppers are likely favoring margarine.

A BRIEF HISTORY OF MARGARINE

Margarine was developed by the French initially in 1869 and further refined during World War I and World War II.  Butter was in short supply and options were explored.  The original versions of margarine were not plant-based but were made from animal fats such as tallow.  Over time, margarine has been refined to provide a product with a similar look and taste to butter and is made from plant-based oils.  The medical and health factors have flip-flopped a few times.  Margarine was outselling butter, but when it was discovered that partial hydrogenation caused trans fats, which increased bad cholesterol and lowered good cholesterol, sales dropped.  In 2015 the FDA mandated that partial hydrogenation is not "Generally Recognized as Safe" (GRAS) and must be eliminated by 2018.  Additionally, the amount of trans fats must be listed in the label if above .5 grams per serving.  Margarine changed from partially hydrogenated oil to maintain a desired melting point to blending plant-based oils (primarily palm oil) to achieve the desired melting point.  Margarine is now supported by the medical profession over butter primarily for heart health reasons.

THE MEDICAL OPINION OF BUTTER AND MARGARINE

The current medical comparison of butter and margarine is consistent.  Respected sources such as the Mayo Clinic, Web MD, Harvard Medical School, and many others have all published papers based on research.  Their conclusions are all closely aligned.  Butter is a saturated fat which will increase bad cholesterol and decrease good cholesterol and can cause blockage in arteries.  The change in 2018 to eliminate partial hydrogenation have shifted the balance to favoring margarine over butter. As mentioned above, trans fats resulting from partial hydrogenation were deemed to be so unhealthy that they are now regulated by the FDA and must be disclosed on the package labels.  

Stick margarine as opposed to tub margarine uses hydrogenation to make the product firmer but it also becomes a saturated fat.  For that reason, the medical community states that tub margarine is considered healthier than stick margarine.  

Both butter and margarine have 80 percent fat with the other 20 percent mostly water.  Margarine does include preservatives, color additives, and taste enhancers, but they are not considered a health issue.  The research organizations add that both butter and margarine are high in calories and should by consumed in limited quantities.

PERCEPTIONS

Butter is a natural product.  The only ingredient in butter is butterfat (and maybe some salt).  Margarine is a manufactured product with additives for color, taste, and preservatives to increase shelf life.  The trend to natural foods has decreased the market for margarine.  

HOW IS MARGARINE IMPACTING BUTTER SALES?

With support from the medical community, margarine sales are again growing.  When combined with the high retail prices for butter and overall food inflation, some consumers will change to margarine.  In grocery stores, butter and margarine are offered next to each other, making comparisons easy.  

Butter and margarine are a small element in the overall food budget.  Many consumers will choose to accept the higher price for a small piece of their food purchases.  As consumption and retail sales data become available, the picture will be clearer.

What is Going on with Butter Prices?

Retail and wholesale butter prices are very important to everyone in the U.S.  In 2022 milk producers received healthy checks for their butterfat.  Now the price is falling.  Consumers are paying dearly for their butter purchases.  They are paying very high retail prices for butter and as a result they appear to be buying less.

The most recent butter prices for retail purchasing as determined by the Bureau of labor Statistics is shown in Chart I below.  In January 2023 retail butter prices hit another record high at $4.88 per pound.

Chart I - Retail Price of Butter per Pound

However, the wholesale price of butter (Chart II), which is used to price producer milk dropped in price for the third consecutive month and is now at $2.46 per pound as covered in the previous post.  The price is dropping further in the February weekly surveys.  February 4 came in at $2.38 per pound and February 11 came in at $2.41 per pound.  

Chart II - Wholesale Price of Butter.

The difference between wholesale and retail prices may be just a matter of time as lower butterfat prices trickle down the chain to lower retail prices.

EXPORTS AND IMPORTS

What role have exports and imports played in creating this volatility?  Chart III shows the relationship between imports of butter and exports of butter.  The U.S. is now exporting more butter than importing. Imports increased by 14 precent in 2022 and exports increased by 42 percent. The 2022 increase in net imports (imports - exports) was only seven million pounds.  

Chart III - Exports and Imports of Butter

BUTTER IMPORTS

In 2022, 57 percent of butter imports came from Ireland with its very strong Kerrygold brand (Chart IV).  Imports from New Zealand and India make up an additional 27 percent of butter imports.  India is the largest butter producer in the world and New Zealand is a major butter exporter.  In the past, Mexico was a major source of butter imports, but the Mexican imports have dropped by 75 percent from 2020 levels.

Chart IV - Imports of Butter by Country

Imports from Ireland (Kerrygold) have increased by 34 percent over the last four years and is now the second strongest butter brand in the U.S. second only to Land O'Lakes butter.  Kerrygold was launched 20 years ago, and Land O'Lakes was launched 100 years ago.  Kerrygold has developed strong distribution in U.S. grocery stores with 83 million pounds being imported.  Kerrygold now makes up about four percent of U.S. butter consumption. 

Chart V - Imports of Butter from Ireland

BUTTER EXPORTS

Exports of butter go primarily to Canada (Chart V).  Canada has a significant butter shortage and has been a consistent importer of U.S. butter.  In 2022 the butter exports to Canada were 43 percent of total U.S. butter exports (Chart VII).  Another 18 percent was exported to Mexico.  Exports to Mexico were up over 300 percent in 2022 compared to 2021.  The remaining balance of butter exports is split between many countries and has varied over time.

Chart VI - Exports of U.S. Butter by Country

The year 2022 was especially strong for butter exports to Canada which were double the prior year.  Canada's dairy industry is unable to supply their increased consumption of butter.  Low wholesale inventories have hit both the U.S. and Canada.

Chart VII - Exports of U.S. Butter to Canada

WHOLESALE DISAPPEARANCE

Wholesale domestic inventory disappearance measures sales of butter to fulfill the needs of distributers and retailers  After four years of significant growth, in 2022, the wholesale disappearance dropped to 2019 levels.  In Chart VIII, the 12-month average at the end of each year is quantified.  Disappearance from inventories in 2022 were equal to all the gains in 2020 and 2021.  The drop in withdrawals is influenced by three factors; lower U.S. butter production, lower butter inventories, and lower butter retail purchases.

Butter inventories declined by 67 million pounds comparing December 2021 to December 2022.  Butter production for the years 2021 and 2022 was nearly identical.  U.S. butter domestic consumption data for 2022 is not yet available, but there are numerous articles expressing estimates of lower domestic purchases.

Chart VIII - Butter Domestic Disappearance from Inventories

WHAT DOES IT ALL MEAN?

While the dynamics of butter exports and imports were volatile in 2022, they still did not have a major impact on domestic butter inventories.  The high domestic retail pricing, lower butter production, and lower retail purchases of butter have created the price uncertainty and volatility.  

There have been no published cases of retail "out of stock" issues for butter.  There is shrinking demand for withdrawals from wholesale inventories meaning that grocery butter inventories are not being sold at historical rates.

Butter is a commodity and will follow supply and demand.  If imports from Ireland continue to grow at their current rate of nearly 10 percent a year, it could partially satisfy a part of the demand for U.S. produced butter.  Perhaps more importantly, lower retail purchases will stimulate increased purchases, 

Most Recent Data says Milk Prices are Falling.

The weekly commodity prices published by the Agricultural Marketing Service (AMS) is the most up-to-date data there is.  The monthly data that is used to price producer milk is made from a summary of the most recent four or five weekly reports.  Every Wednesday, the AMS publishes the wholesale prices from their survey of the prior week.   Unlike futures prices, that can be influenced by speculators and other events, the AMS numbers are based on the real prices paid.

This post will use the AMS weekly numbers to follow trends of what is really happening.  There are four commodities that are used to price components in the Class and Component system.  They are cheese, butter, nonfat dry milk (NDM), and dry whey.  The most current data shows a price drop in every commodity.  

Charts in this post use prices for the last five years to create a "normal" comparison before the disruption from COVID "stay at home" policies.

CHEESE

The value of cheese compiled by AMS is based on cheddar cheese only as that is the basis used for producer milk pricing.  The data is compiled for both blocks and barrels of cheese.  The blocks are used for production of cheese slices, shredded cheese, etc.  The barrels are typically used as an ingredient in products like processed cheese.  The value of barrels is typically lower than the value of blocks, but there are occasionally inversions based on supply and demand.  The block and barrel prices are combined to calculate the cheese prices used to price milk protein.

Barrel prices (Chart I) began falling earlier that block cheese prices (Chart II) but both are falling.  The fall in block prices is small but the recent 24 percent drop in barrel prices is significant. Both block and barrel prices signal a price drop.

Chart III has both the block and barrel prices to illustrate the variation in pricing.  The current spread between block and barrel Cheddar prices is $.35 per pound.   This is the largest spread seen in five years ignoring the extreme spreads during the early COVID adjustments.  This means there is disruption between block and barrel wholesale supplies and demand.  This will likely be corrected quickly.  Because both blocks and barrels are decreasing in price, correction of supply and demand will probably not change the trends for lower pricing.

Chart I - Prices of Barrel Cheddar Cheese

Chart II - Prices of Block Cheddar Cheese 

Chart III - Price Spread Between Blocks and Barrels

BUTTER

Butter prices are on a severe drop, falling back to near 2018 and 2019 levels, a drop of 27 Percent (Chart IV).  This is a little surprising since production (Chart V) and inventory levels (Chart VI) are still extremely low.  More details on butter will be covered in the next post.  While the formulas for butterfat are very simple compared the formulas for milk protein, there are some other complicating factors that come into play and will be covered in the next post.

Chart IV - Price of Butter

Chart V - Butter Production

Chart VI - Butter Inventories

NDM

Nonfat dry milk has become very important in producer milk pricing since the change to include it in all monthly Class I fluid milk prices.  Nonfat dry milk is primarily an export item and competes internationally with skimmed milk powder.  Exports for the most recent months show that 72 percent of U.S. production of NDM and SMP are exported.  Prices have taken a drastic fall starting in mid 2022.  Wholesale prices for NDM have dropped by 30 percent in the last six months.

Chart VII - Price of NDM

DRY WHEY

Dry whey has taken the biggest fall, dropping by nearly 50 percent in the last year.  Fortunately, the price of dry whey used to price "Other Solids" has a very small impact on producer milk prices.

Chart VIII - Price of Dry Whey

SUMMARY

Are prices dropping?  Yes, in every commodity category.  

The cheese price for January 2023 was down 18 percent from the 2022 high.  February's weekly prices are indicating another drop for the month of February.  

The butter price for January 2023 was down 23 percent and the most recent weekly prices are continuing to drop.  In the next post, imports and exports of butter including the amazing increase of butter from Ireland (think "Kerrygold").  Is American produced butter being replaced by imports?  Are retail prices dropping? The next post will review these factors is detail.

NDM prices are very important but are controlled by international factors.  With 72 percent being exported, prices can be volatile.  Globally, the standard is SMP, not NDM, but U.S. production of SMP is much smaller than NDM and it is not growing.  

As for dry whey, well, while prices are down considerably, it does not impact producer milk prices much at all.

Did Butterfat and Protein Levels Grow 2022?

In the prior post, the growth of milk and cows in 2022 was explored.  Milk per cow was growing at an average of one percent per year.  If components were also growing at that rate, there would be enough growth in milk components to support the growth of butter and cheese.

Component data is now available for the entire year of 2022.  In a nutshell, butterfat in milk is growing fast enough to meet this goal.  In fact, with the high prices for butterfat, 2022 was a very strong year for butterfat levels.  Protein levels are growing a little slower.  This post will also cover Somatic Cell Counts (SCC).  SSCs seem to be reaching a level where further improvement is very slow.

BUTTERFAT PERCENT

Table I below lists the percentage of butterfat in milk from highest to lowest for each Federal Order.  All Federal Orders get paid for the volume of butterfat that their cows give.  In 2022, the average butterfat percent broke the four percent barrier and ended the year with an average of 4.06 percent butterfat.  The four Federal Orders paid on the advanced system are all at the bottom of this Table.  While the four at the bottom do not get paid for protein, they do get paid for all the butterfat they can produce.  Florida, the smallest Federal Order is at the very bottom with more than a half percent less butterfat than the top Federal Order.

Table I - 2022 Butterfat Content
by Federal Order

An important question is at what rate is butterfat percent growing?  Table II lists the same 11 Federal Orders by their 2022 percent increase in butterfat.  If a herd's butterfat was at 4 percent, to increase butterfat levels by one percent, they would have to grow butterfat content by .04 percent butterfat to 4.04 percent.  The Pacific Northwest grew by almost five percent in 2022 increasing butterfat levels from 4.11 percent to 4.30 percent, a huge one-year increase.

The year 2022 was amazing with an average an overall increase of 2.27 percent.  The overall average for the last five years is .91 percent increase, near to the one percent annual increase needed to meet the needs of processors without adding cows.  All Federal Orders showed increases except the Southwest.  The Southwest had nice increases in 2020 and 2021 and held on to those increases in 2022 but made to further gains.

Table II - Butterfat Increase by
Federal Order for 2022

Chart I shows the seasonal variations in butterfat levels.  It also shows that with the incentive of high butterfat prices, significant growth in butterfat levels is possible.  As butterfat prices fall (the subject of the next post), will butterfat levels continue to show healthy growth?

Chart I - Monthly Butterfat Levels

Chart II takes the seasonal variation out of the picture by using 12-month moving averages.

The butterfat increase gained speed in 2021 and 2022 with the record butterfat prices.

Chart II - 12-Month Moving Averages of Butterfat Levels

PROTEIN PERCENT

High protein levels are very important for cheese makers, the biggest users of milk.  If there is not enough protein in the milk, more must be added to capture the butterfat in cheese when the Casein proteins coagulate.

The Pacific Northwest is again at the top of the list with a .15 percent difference from the average.  There are seven Federal Orders that are paid for protein specifically.  They are ranked by protein content in Table III below.

Table III - Protein Content by
Federal Order in 2022

The increases in 2022 averaged 1.25 percent (Table II).  However, the average annual growth for the last five years was only .69 percent.  The growth rate of protein in 2022 was significantly lower than the growth rate of butterfat.  As covered in the January 11 post, when the price of butterfat goes up, the price of protein goes down creating less of an ROI for increasing protein levels.

Table IV - Protein Increases by
Federal Order for 2022

Protein levels in milk have the same seasonal pattern as butterfat with the highest levels occurring in the November to January period (Chart III).

Chart III - Monthly Protein Levels

Chart IV displays the protein percentage using 12-month moving averages.  In early 2020, protein levels did not increase.  But by midyear, they began their steady increase as shown in Chart IV.

Chart IV - 12-Month Moving Averages of Protein Levels

SCC

SCC did not improve in 2022.  SCC is reported based on Federal Order payment data for the four Federal Orders that are paid with the SCC adjustment factor.  Table IV lists the SCC for 2022 for each of these Orders.  Comparing the four Orders, the pattern follows the latitude of the four Federal Orders.  The Upper Midwest has the coolest summers and the lowest SCC.  The Southwest, primarily Texas, has the warmest summers and the highest SCC.

Table IV - The 2022 Somatic Cell Count in thousands
for the Federal Orders paid for lower SCCs

SCCs are highest in the warmest part of the year as shown in Chart V below.   This chart does not show improvement in the warmest part of the year, but it does show improvement in the cooler months with increasingly low SCC.  Can we blame this on global warming?  The Southwest also has the largest variation in SCC.

Chart V - Monthly Somatic Cell Counts

Chart VI is based on 12-month averages to remove annual cyclical variances.  While the data does show some improvement, it is not as consistent as the same charts for butterfat and protein levels.   The trend line does show a slowdown in reducing SCC.  Further reductions may occur slowly.

Chart VI - 12-Month Moving Averages
of Somatic Cell Counts 

SUMMARY

Butterfat levels have grown significantly in 2022 with the strong prices.  Protein has not grown as fast perhaps driven by negative protein pricing impact of high butterfat prices.

Somatic Cell Counts appear to be leveling off.  Will it be possible to get below 100,000?