Butter Production is a Problem!

The prior post covered how cheese production was doing.  The conclusion is that cheese production is growing nicely and seems to have a good balance of wholesale disappearance and inventories.  By contrast, butter production is shrinking, wholesale butter disappearance is declining, and inventories are low.  As result, butter prices continue to rise to record highs.

As shown below in Chart I, butter production (the blue line) began falling in early 2021 and has continued to fall through June 2022.  Prior to that, butter production was tracking very nicely with significant increases of two to three percent annually.  Since the beginning of 2021, production has fallen by five percent.

Disappearance from butter wholesale inventories (the red line) began declining in early 2022.  The decrease in production is significantly more than the butter disappearance from inventories.  That is depleting butter inventories.  

Chart I - Butter Production and Domestic Disappearance

Wholesale butter inventories have tightened by 17 percent based on 12-month averages in the last year as shown in Chart II below.  There is a clear relationship between the inventory levels and the price of butter.  As butter inventory decreases, the price increases.  

The combination of lower production, tighter inventories and higher prices is likely influencing domestic consumption.   The annual report on consumption of dairy products will be available at the end of this month and will be covered in an upcoming blog post.

Chart II - Butter Inventory and Price

The current monthly price of butter has increased to a 23 year high of $2.98 per pound and the increase has happened in a matter of months.  From April 2020 to August 2022 butter increased in price by 136 percent.

Chart III - Twenty-Three Year Butter Price

As a result, the butterfat price has hit a record high of $3.40 per pound in August.  That is a 157 percent increase in Since April 2020!  The price is a record, but the speed at which it increased is also a 23-year record.

Chart IV - Twenty-Three Year Butterfat Price

This is the reason for high producer milk prices.  This is a time when butterfat is like a gold rush.  Producers who quickly increase butterfat content in their milk will receive a very healthy check for their milk.  Every producer in a Federal Order gets paid for butterfat content, and those not in a Federal Order are also typically paid for butterfat content.

With the high domestic butter prices, it is surprising that butter exports are increasing (Chart V).  While butter exports remain a very small percent of total butter production, the increased exports do put additional pressure on butter inventories.

Chart V - Butter Exports

Nonfat Dry Milk (NDM) is a co-product of butter churning.  So, when less butter is churned, there is less NDM produced.  NDM is the largest export product.  In July NDM exports decreased by nine percent versus the prior year.  

Chart VI - Butter and NDM/SMP Production

California is by far the biggest butter producer in the U.S. with a market share over 33 percent.  In 2021 and 2022 California has been able to maintain butter production at 57 million pounds per month (Chart VII).  Prior to 2021, butter production was growing rapidly in California.  The total U.S. decline in butter production, shown in Chart I above, is coming from states other than California.

Chart VII - California Butter Production

The huge change in butter production and pricing is not over.  It is not showing any changes that would bring butter inventories or pricing to more normal levels.  

In the July 3 post to this blog, it was predicted that butter prices would continue to climb and cheese prices would decline.  That prediction still holds.  That will continue to increase the value of butterfat and lower the value of milk protein.

The next post to this blog will cover U.S. milk production.  Cheese is receiving adequate milk to grow the business.  Butter is not.  What is happening to the milk supply?

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