What's Going on with Butter?

May 14, 2015 04:00 AM
What's Going on with Butter?

Butter prices are surging in part due to strong demand for milkfat and a drop in production.

The U.S. butter market has been on a tear, despite a cool spring, weak exports and a strong flush in much of the country. In fact, CME spot butter prices penetrated the psychologically important $2/lb. mark on Monday, May 11. The last time butter prices were above $2/lb. was November 11, 2014. So what gives?

Lower milk output in California in March resulted in a 1.5-percent, or 8.8-million-pound, decline in butter production in the Golden State. April butter production was also likely down as producers in California, the nation’s top producer of butter, continue to struggle with much lower profit margins than last year, which has resulted in a slightly smaller milk herd.

Elsewhere, the nation’s milk supply appears to be heading to cheese vats at the expense of butter.

“Geography alone, however, does not explain the shift away from butter and toward cheese production,” says Sarina Sharp, agricultural economist with the Daily Dairy Report.

“Even in the Central region, where heavy milk flows reportedly have been straining processing capacity, butter output in the first quarter was 3.7 percent lower than a year ago and 9.5 percent lower than March 2013. With spot butter now over $2/lb., manufacturers could choose to send more milk to the churn and less milk to the cheese vat in coming months,” says Sharp.

CME spot butter prices have been slowly trending higher since early April, but last week CME spot butter prices took off, climbing to $1.985/lb. by Friday. Butter futures followed suit, closing higher every day last week. On Thursday and Friday of last week a number of contracts settled limit up (5 cents), and all but the May 2015 contract set new contract highs.

Where’s the fat?

Domestic demand for butter has been robust, and that has helped support the market.

“An even greater driver than demand in rising prices, however, is tightening supplies,” notes Sharp.

USDA’s Dairy Products report for March showed U.S. butter output at 161.7 million pounds, down 3 percent or 4.95 million pounds less than the prior year. Butter production for the first quarter of 2015 fell to 498 million pounds, down 3 percent from the comparable period a year ago and 8.3 percent lower than first-quarter 2013. At the same time butter production fell, U.S. milk production in the first quarter was 1.7 percent stronger than the year before.

“Some milkfat has been funneled to ice cream manufacturers,” says Sharp. U.S. ice cream and yogurt production, along with mixes for frozen dairy products, grew 4.4 percent in the first quarter of this year relative to the year before. “That represents an additional 24.9 million gallons of finished product,” says Sharp. “Ice cream output likely rose again in April as the industry prepared for summer demand.”

Strong cheese output has also been reducing the amount of cream available to butter churns. U.S. cheese production rose 2.8 percent or nearly 78 million pounds in the first quarter of 2015 compared to first-quarter 2014.

“Assuming an average butterfat content of 30 percent, the increase in cheese production represents an additional 23.4 million pounds of butterfat used by cheese manufacturers,” notes Sharp. “Milk output has been strongest in the traditional cheese-producing states, and cheese production has grown quickly. Wisconsin and Minnesota alone produced 33.9 million pounds more cheese in the first quarter of this year than the first quarter of last year, accounting for 44 percent of the total national increase.”

To subscribe to the Daily Dairy Report, go to: http://www.dailydairyreport.com/default.aspx and click register.

Back to news



Spell Check

No comments have been posted to this News Article

Corn College TV Education Series


Get nearly 8 hours of educational video with Farm Journal's top agronomists. Produced in the field and neatly organized by topic, from spring prep to post-harvest. Order now!


Market Data provided by QTInfo.com
Brought to you by Beyer