Butter - Understanding Dairy Markets

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Analysis & Comments
Livestock Marketing Information Center
State Extension Services in Cooperation with USDA
July 1, 2011
Letter #26
BUTTER: Stocks, Production, Trade, and Consumption
Milk can be used for a diverse array of products with a multitude of characteristics. As a result the dairy
complex has a multitude of data, including prices, production, stocks, trade and consumption. All these
pieces are slightly different depending on product but largely have similar relationships when discussing
market forces. The dairy complex has entered what many believe to be a new era of globalization. U.S.
products are increasingly being consumed overseas, and the link between trade and other facets of a
product is critical to the understanding of volatility and market direction. However, not all dairy products
have data provided through public channels for various reasons. Butter will be the focus of this article,
based on data availability and heightened interest from export markets.
Production
Butter production in the U.S. is highly seasonal with output the highest in the winter months and
decreases in the summer months. On average butter production declines 50% from January to August,
before increasing 36% August to December. The seasonality of butter production is a product of two
items. First, milk production declines in the summer months as does butterfat tests. Butterfat yield
follows a similar cycle, although not to the degree production fluctuates. Butterfat or milk fat (usually
when referred to the raw product) is the portion of milk made up of fat. Butterfat tests are usually the
highest in December and lowest in July, however percentage wise, the decline in butterfat is only 7%
from the highest to the lowest month. Second, summer increases competition for other products that use
butterfat, mainly ice cream. Butter essentially takes this fat and removes the liquid through a process
called churning. Other products use milk fat as well, but ice cream probably uses the most in terms of
quantity. Ice cream requires a minimum of 10% butterfat, and has the biggest draw during the summer
months. Ice cream production peaks mid-summer as butter production troughs in late summer. Figure 1
and 2 depict butter and ice cream production seasonality.

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Figure 1: Seasonal Index for Butter Production in the United States. Data Source: USDA-NASS Dairy
Products Monthly
Index Value
1.4
1.35
1.3
1.25
1.2
1.15
1.1
1.05
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
Maximum
Average
Minimum
Months
Figure 2: Seasonal Index for Ice Cream Production in the United States. Data Source: USDA-NASS Dairy
Products Monthly
1.4
Index Value
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
Average
Maximum
Minimum
Months
Even with a great degree of production fluctuation during the year, butter production has remained
steadily increasing year after year. Graphically, a zig-zag pattern occurs when monthly production is
graphed year after year. Regressing production data against time yields a linear curve gaining 100
thousand pounds of butter produced annually. Figure 3 illustrates both actual and trended production.

LMIC
Page 3
Figure 3: Butter Production. Data Source: USDA-NASS Dairy Products Monthly
1000s lbs
180000
160000
140000
120000
100000
80000
60000
Actual Production
Trended Production
Cold Storage
40000
Jan‐96
Sep‐96
May‐97
Jan‐98
Sep‐98
May‐99
Jan‐00
Sep‐00
May‐01
Jan‐02
Sep‐02
May‐03
Jan‐04
Sep‐04
May‐05
Jan‐06
Sep‐06
May‐07
Jan‐08
Sep‐08
May‐09
Jan‐10
Sep‐10
Months
Lumpy production indicates there is most likely uneven amounts of inventory unless consumption closely
matches production. Month-end inventory data is provided in a mandatory survey done by USDA-NASS
(National Agricultural Statistics Service) in the Monthly Cold Storage report, which describes frozen
butter that will be generally stored 30 days or more. Unsurprisingly, butter inventories move largely
opposite of production month-to-month. Highest inventories of butter are usually in the summer and are
the lowest in the fourth quarter of the year.
Looking back to cold storage in January 1992, butter inventories were extremely high. In 1992 butter
inventories were nearly 800 million pounds, a result of price supports and production outpacing
disappearance. The price supports declined after 1992 moving butter to a market pricing system. From
1992 to 1996 disappearance caught up with production and eventually helped whittle away stocks to the
lowest they have been to date at 13.7 million pounds. The movement to a market driven price had several
implications: an overall higher average price, greater price volatility and lower stocks in cold storage.
Since then, butter inventories have had a greater control over price. General themes indicate prices
average higher when cold storage is lower. By looking at annual average price and inventory this pattern
is more evident and is shown in Figure 4. Note changes in price are usually a within $0.40 per pound
(33%), while cold storage changes are much greater (sometimes moves greater than double).

Page 4
Figure 4: Annual Price and Cold Storage Levels: 1999-2010. Data Source: USDA-NASS Monthly Cold
Storage
Lbs in Cold Storage
250000
Price per Lb
$2.00
$1.80
200000
$1.60
$1.40
150000
$1.20
$1.00
100000
$0.80
50000
0
Cold Storage
Butter Price
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
$0.60
$0.40
$0.20
$0.00
Trade
Previous to the last five years, exports of butter have relied on subsidies from incentive programs as a
way to clear out inventory levels. As discussed above, cold storage levels were at record levels and to
alleviate some of the burden exports were heavily subsidized to reduce inventory levels. Butter exports
from 1980-1994 are subsidized as a result of direct product sales by the government or disbursement
through U.S. aid programs. Heavily aided by these export programs, shipments spiked throughout 1992-
1996, before inventory levels dropped to new lows.
Trade had returned to a more flat stagnant pattern for close to a decade. From 1997 to 2006, butter
exports were uninterrupted and were very low compared to the patterns experienced in the early 1990s.
Since 2006, exports have risen significantly but tumultuously. The volatility in exports makes it difficult
to discuss a normal trend, when as recently as 2009 exports decreased nearer to the level they were at for
the prior decade. Figure 5 shows annualized trade figures from 1991 through 2011 year-to-date.
Imports have also followed cold storage volumes, remaining high in years of low inventory and
decreasing in years of higher inventory. High spikes in imports largely follow high spikes in domestic
prices. Historically, months where domestic price has been above $1.70 per pound imports have risen
drastically. Import influxes seemingly from price increases have occurred in 1998, 2001, 2004, and 2008.
So far, 2010 and 2011 have failed to follow the historic pattern. It is likely this failure is due to the
differential between domestic and world prices, butterfat supply and currency rates during this time
period.

LMIC
Page 5
Figure 5: Annual Imports and Exports of Butter (HTS Trade Codes 40510). Data Source: USDA-FAS
using GATS.
1000 lbs
200000
150000
Exports
Imports
100000
50000
*2011 is YTD
0
Year
Domestic Consumption
Butter use in the U. S. is also highly seasonal. The peak month for use is in October, while the lowest
month is December. Use is calculated by taking previous month’s cold storage inventory, adding
production and imports and then subtracting exports and cold storage for current month. By calculating
disappearance in this manner, it provides a look at domestic use for a single month. Domestic use year
over year is increasing, however, at a decreasing rate.
Consumption seems to be impacted in general by price but with a time lag. The USDA-NASS weekly
prices in the Dairy Product Price report represent commercial prices; inventory purchased is captured by
consumption unless picked up by cold storage or exports. These prices, however, are not capturing the
price the consumers pay and thus by lagging consumption, the relationship between price and
disappearance is more evident.
Butter consumption is further complicated by the variety of substitutes and definitions of butter. One of
butter’s biggest competitors is margarine. Data dating back to 1909 compiled by USDA-ERS (Economic
Research Service) shows the strong relationship. Total consumption of both products has been on the rise
since 1909, with little interruption, gaining on average 25 million pounds a year through 1993. Since
1993 total consumption has dropped significantly, falling on average of 85 million pounds a year. Over
the last century butter and margarine have swapped market share twice, most recently in 2005 (See Figure
6).
Butter was supreme in use prior to 1958. However, margarine consumption was responsible for the quick
gain in total consumption of both products, surging upwards from 1909 through 1993 also. Margarine
surpassed butter consumption in 1958 and has remained the higher use product until very recently. Butter
use has been less turbulent, gradually declining since the 1930s through the 1980s. Recently, however,

Page 6
butter has overtaken margarine once again and seems to be gaining ground, despite the overall decline in
the use of both products.
Figure 6: Butter versus Margarine Use: 1909-2010. Data Source: USDA-FAS, compiled by USDA-ERS
Mills. Lbs
3,500
3,000
2,500
2,000
1,500
1,000
500
Total Butter Use
Total Margarine Use
0
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Year
The Role of International Price and Expectations
International prices play a role also in butter inventories, trade and prices. Price data is available through
Oceania and European ports but is provided per fortnight, and is a sample of supplier sales. International
prices have generally been lower than the domestic price, historically. Comparing USDA-NASS Dairy
Product Prices figures to the international prices reported by USDA-AMS (Agricultural Marketing
Service) in Dairy Market News, the earliest data (September 1998 domestic price), has always been much
higher than the converted ($/MT to $/lb) international price until 2007. In 2007 and 2008 international
prices were substantially higher and since 2008 the U.S. domestic price has remained in line with both the
European and Oceania prices.
Price divergence was so great in the previous decades that it is no surprise the U.S. had limited exports
during that time, without the help of government subsidy. However, as of late, butter exports have been
climbing more on their own, but with some assistance from the Cooperatives Working Together’s export
assistance program. With more consistent exports and a greater world marketplace, U.S. markets should
remain more closely in line with international prices, but it is also important to see that international
prices have actually risen to the level higher than the conventional U.S. price range and with it; U.S.
prices have followed them upward past $2 per pound (See Figure 7).

LMIC
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Figure 7: Weekly International and Domestic Prices: 1998-Current. Data Source: USDA-AMS Dairy
Market News and USDA-NASS Dairy Product Prices.
U.S. $ per Lb
$3.00
$2.50
$2.00
$1.50
$1.00
Europe
$0.50
Oceania
United States
$0.00
9/4/1998
1/4/1999
5/4/1999
9/4/1999
1/4/2000
5/4/2000
9/4/2000
1/4/2001
5/4/2001
9/4/2001
1/4/2002
5/4/2002
9/4/2002
1/4/2003
5/4/2003
9/4/2003
1/4/2004
5/4/2004
9/4/2004
1/4/2005
5/4/2005
9/4/2005
1/4/2006
5/4/2006
9/4/2006
1/4/2007
5/4/2007
9/4/2007
1/4/2008
5/4/2008
9/4/2008
1/4/2009
5/4/2009
9/4/2009
1/4/2010
5/4/2010
9/4/2010
1/4/2011
5/4/2011
Week
Some key drivers will determine if prices both international and domestic will remain at current levels.
World demand for butterfat is probably the biggest factor. In the U.S. volumes have been reduced at
higher butter prices. Year-to-date sale volumes are approximately 80% of last year’s. Figure 6 describes
domestic butter sales volume. In the June, 14, 2011 Dairy Product Prices report by USDA-NASS butter
hit $2.14 per pound and volumes dip below the five year average. Lowest volumes occur when butter is
above $2 per pound, which is well above (37%) the weekly five year average price.
Despite high prices, and softening volumes, butter prices are expected to remain above $1.90 per pound
for the remainder of the year. Strength in global demand will continue to support prices both here and
abroad. Exports year-to-date are double what they were in 2010. Low inventory levels also should
support price levels. Prices are high enough manufacturers are unlikely to want to hold more product than
is necessary to meet needs. Finally, domestic demand is also picking up as shown in Figure 5, surpassing
margarine, and feeding off emerging food trends that encourage eating natural food.
Conclusions
The interconnection of cold storage, trade, production and price make it difficult to describe finite
relationships connecting each. In reality it’s the constant moving parts of each that describe the butter
complex as a whole. Peeking into some of the relationships, even if they are generalizations does provide
some understanding to price volatility. Transparency, however, is still something that eludes many
products in the dairy industry because of this interconnection of data, data availability and the timeliness
of some data products.