Butter, Butter, Butter

Butter and butterfat prices continue to drive high milk prices.  In the April 15 post to this blog, dairy prices since 2000 were reviewed.  This post will center on butter and butterfat in detail as they are the main drivers of the current high producer milk prices. The current price of butter is $2.77 per pound for April 2022.  That is not a record as butter prices in 2014 reached $2.85 per pound.  However, $2.77 is a record monthly price over the last five years.

When butter inventories are high, butter prices are low and when butter inventories are low butter prices are high.  Chart I below shows the correlation between the 12-month moving averages of butter inventories and butter prices.  Clearly, butter inventories drive the price of butter.

Butter inventories have dropped by 11 percent from the high in July 2021 to February 2022.  However, butter inventories are not near record lows, so butter inventories may continue to decline and drive butter prices even higher.  

Chart I - Butter Prices vs. Butter Inventories

Chart II shows the declining production of butter in 12-month moving averages.  In April 2022 butter production continued to decline, but at a slower pace than in late 2021.  The growth rate of butter production slowed down at the beginning of COVID in early 2020 and started declining in 2021. Producer milk availability and logistics are typically blamed for the slowdown in butter production.

Chart II - Butter Production

The largest butter producing state by far is California with 33 percent of butter production (Chart III).  Pennsylvania is a poor second.

Chart III - Butter Production by State

The decrease in butter production is not coming from California.  California butter production has leveled-off starting in 2021 but has not significantly declined.  Pennsylvania, the second largest butter producing state, is much smaller than California and is also not showing declines.  The declines are coming from the many other states that produce smaller amounts of butter.  Together the smaller butter producing states make up 63 percent of the U.S. butter production.

Chart IV - Butter Production by state and all Other

Over the course of Chart V, California's percent of U.S. butter production has grown from 30 percent to 33 percent over five years.  It appears that California butter production is upward bound to increase their market share.

Chart V - Percent of USA Butter Produced in California

Changes in the inventory of butter (Chart I) are driven by production, but the rate of domestic butter disappearance and exports and imports also impact butter inventories.  Chart VI tracks the domestic butter disappearance.  Butter disappearance from wholesale inventories does not fluctuate much.  So far in 2022, despite tighter inventories, disappearance has declined by less than one percent.  However, the wholesale prices have escalated significantly.

Chart VI - Butter Disappearance

In times of tight butter supplies, exports typically decline.  In this case, butter exports and butter imports both grew.  However, the increase in imports was greater than the increase in exports, causing net exports to decrease (Chart VII).  Imports have continued to grow with significant imports of Irish butter such as "Kerry Gold."  For the first two months of 2022, imports grew by 64 percent vs. the prior year.  Imports of butter now account for 3.5 percent of total butter additions to inventory with production contributing the other 96.5 percent.  Exports have also continued to grow, but at a slower rate than imports.  

Chart VII - Butter Net Exports

PUTTING THIS ALL TOGETHER

There is not presently a shortage of butter in U.S. retail stores as domestic disappearance has keep pace with retail butter sales. However, there is a significant increase in retail butter prices as wholesale prices have increased.

If butter production does not increase soon, inventories will continue to decrease and butter prices at the wholesale and retail levels will increase. With higher retail prices some slippage on butter sales and consumption may occur as there are plant-based alternatives.

As covered in the previous post, fluid milk is on a linear decline of about 80 million pounds of milk per year.  Over the period of this analysis, butterfat harvested from fluid milk has decreased at a rate of about 1.6 million pounds of butterfat per year which converts to about two million pounds of butter per year.  This is significantly impacting butter production. Compounding annual butter churning declines of two million pounds per year reduces butter churning by 10 million pounds over five years.

Lack of producer milk and logistics are often sighted as the problems, but the decrease in butterfat from fluid milk is also very significant.  Fluid milk has declined for decades and that is not likely to change.

Nonfat dry milk and skim milk powder production decreases when butter production decreases.  This has also inflated nonfat dry milk and Class IV milk prices.