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Butter at 16-Year High as U.S. Exports Cut Reserves

July 26, 2014
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Retail butter fetched $3.04 a pound on average earlier this month, up 20% from a year earlier, the USDA reported on July 10.   

A shortage of butter is fueling higher prices, but will it last?

The 1,000 pounds (454 kilograms) of butter that Gerhard Michler uses every week to make cookies, cakes and petit fours at his San Francisco bakery is leaving the pastry chef with a case of ingredient indigestion.

While all his costs are up, including chocolate, none rose more than the butter used in everything Michler bakes at Creative International Pastries. Prices on the Chicago Mercantile Exchange jumped 81 percent in a year to $2.62 a pound, the highest since 1998, as surging U.S. exports eroded inventories and dairies failed to keep up with increased demand.

"There’s a shortage of butter," Jon Spainhour, a broker and partner at Chicago-based Rice Dairy LLC, said in a telephone interview July 3. "This spring, instead of building inventories, we just shipped it out of the country. We’ve hauled a lot of product out of the market."

Even as rising global milk output signals a slowdown in U.S. exports, tight domestic butter supplies are contributing to higher costs that buyers including Panera Bread Co. expect will last through 2014. Retail-food prices are rising at the fastest pace in three years, fueled by meat, dairy, eggs, fresh fruit and vegetables, government data show.

The spot price of butter has surged 71 percent this year, after yesterday reaching the highest close since September 1998, and butter futures on the CME jumped 58 percent, touching a record $2.50 today before dropping. The Bloomberg Commodity Index of 22 raw materials gained 2.7 percent this year, while the MSCI All-Country World Index of equities rose 6 percent. The Bloomberg Treasury Bond Index gained 3.6 percent.

Export Surge

U.S. butter exports got a boost after a two-year slump in prices that reached a 15-month low in August. Shipments in the first five months of 2014 totaled 38,897 metric tons, up 64 percent from a year earlier, and are on pace to exceed the full- year record of 92,300 tons in 1993, U.S. Department of Agriculture data show. Domestic production through May this year dropped 3.6 percent to 842,127 tons, while demand through April, the most-recent data available, is up 9.9 percent.

Domestic stockpiles that in May 2013 were the highest in 20 years have slumped with a surge in shipments to buyers including Saudi Arabia, Morocco, Egypt and Iran, government data show. Inventories as of June are down 42 percent from a year earlier to 186 million pounds (84,426 tons).

Emerging Markets

Rising incomes in emerging markets are driving demand for dairy products and other higher-cost foods, including meat, and the U.S. has become the world’s second-largest exporter of milk products after New Zealand.

"All major U.S. dairy-product export volumes have continued to experience meaningful year-to-date increases," Gregg Tanner, the chief executive officer of Dallas, Texas-based Dean Foods Co., the largest U.S. milk processor, said on a May 8 conference call with analysts.

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