“It’s better with butter” might be a marketing theme, but it’s also true when it comes to dairy farmer milk checks.
Without the strong U.S. butter prices during a recent period of weak world prices, domestic milk prices would have averaged more than $1 per hundredweight (cwt) lower than they did during the entire 12-month period of August 2015-July 2016. That would have cost U.S. dairy farmers about $2.2 billion in lost income during that time, according to Peter Vitaliano, vice president of economic policy and market research with the National Milk Producers Federation (NMPF).
Highlighting a new NMPF report commissioned by Dairy Management Inc. (DMI), Vitaliano said the good news related to butter and milk fat may be just getting started for U.S. dairy farmers. Butter demand is growing, leading some officials to suggest there’s a global shortage. Not only is butter use on a significant uptick, it’s also taking a larger share of total available milk fat, Vitaliano said.
Butter’s share of U.S. milk fat use was running about 16 percent in 2000, but has increased to 18-19 percent in recent years, and is trending higher.
“That’s despite the fact both U.S. milk and milk fat production has been increasing,” Vitaliano said. “Butter consumption is increasing faster than milk fat production.”
Beyond butter
The milk fat story goes beyond butter, said Vitaliano. He cited the trend toward increased sales of fluid whole milk. Even though total fluid milk consumption has been on the decline, whole milk, standardized at 3.25 percent milk fat, is increasing in its market share of the fluid category. Fluid milk sales now consume nearly 2.75 million pounds of milk fat per day, up from about 2.65 million pounds in 2015.
“Fluid milk used to contribute more milk fat back into the system by throwing off cream, but today it is increasing its use of milk fat and tightening the supply-demand balance for fat overall,” Vitaliano said.
Vitaliano said trends away from reduced-fat cheeses, ice cream and yogurt are also increasing the use of milk fat.
Changing butter dynamics
The new demand for milk fat has changed milk and dairy price dynamics on a number of fronts, Vitaliano said.
First, the value of milk fat as a share of a farmer’s milk check has grown. Although volatile, milk fat’s contribution to a dairy farmer’s total milk check averaged about 38 percent between 2000-16, occasionally dipping to 25 percent, and rarely moving above 50 percent. As milk fat demand has grown, its share rose to about two-thirds of the total milk check in early 2016. While declining somewhat since then, Vitaliano projects milk fat’s share of the milk check to remain “north of 50 percent” for the foreseeable future.
Strong butter and milk fat demand has prompted the USDA to raise its projected 2017-18 Class IV milk prices by 35-45 cents per cwt from earlier forecasts.
A second changing dynamic is the apparent disconnect between U.S. butter inventories and wholesale prices.
As U.S. milk production has grown, so has butter production and inventories of butter in cold storage. Butter inventories levels are highly seasonal, historically building in the first half of the year and peaking in May-August, before beginning to draw down and reach annual lows during the year-end holidays.
However, while cheese inventories may be holding down prices, the story is different for butter. Vitaliano estimates current inventories are “about 10 days” overstocked of current needs, but so far prices have resisted downward movement.The USDA’s National Dairy Products Sales Report (NDPSR) shows U.S. wholesale butter prices rose 33.3 cents per pound between June 3 and July 8.
“Ten years ago, the markets would have reflected that very strongly,” Vitaliano said. “Yet, today we have butter holding at about $2.60 per pound and creeping up. It looks like we have a change in the traditional inventory/milk price relationship, based on strong consumer demand. If the market thinks things are tight, we’re going to see prices react accordingly.
“It can’t go on forever, but the holiday season and enhanced milk fat and butter demand will be upon us sooner than you think,” he continued. “People aren’t too uncomfortable with these levels of inventories, because we’re going to need them at the end of the year.”
Except in periods of extreme surplus, Vitaliano doesn’t foresee butter prices falling much below $2 per pound.
“There’s a huge pent-up demand that will come out in anytime butter prices get close to $2 per pound. This has long-term benefits for dairy farmers,” he said.
A third changing price dynamic is the U.S./world price relationship. Historically, milk fat has been a product in surplus, both domestically and on the world market. As a result, U.S. butter prices have been higher than subsidized world prices.
However, with high global demand for butter, U.S. butter prices have been somewhat lower than Oceania prices through early 2017.
It usually takes several months of persistent gaps between U.S. domestic prices and foreign export prices to impact exports. But with higher domestic demand for milk fat, less U.S. production will be available for export markets, even though U.S. prices are competitive.
“Our exports are down,” he said. “We need that extra milk fat to meet demand in our own market.”
One current strong butter export market is Canada, where consumer demand for butter is also growing. Canada is trying to increase its domestic production of butter, which is playing out in a U.S.-Canadian skirmish over a resulting byproduct, protein.
Other impacts
Vitaliano said the demand for fat is translating to management practices on the farm, from feeding to breeding. Genetic selection, including an increase in Jerseys and crossbreds, as well as selection for more milk components among Holstein breeders, is driving higher milk fat output.
California feeling the heat
Summer heat is impacting output in the U.S., especially California, which is entering its seasonal low for butter production, according to the American Farm Bureau Federation (AFBF) economist Katelyn McCullock. That’s on top of a 6 percent decline in California butter production through the first five months of 2017.
California is home to 14 of the 86 butter production facilities in the U.S., and produces about 30 percent of total U.S. butter annually. California actually produces a much larger proportion of butter than cheese relative to the national picture.
Rabobank Dairy’s Kevin Bellamy forecasts global milk and milk fat production will continue to grow, but won’t be enough to keep pace with butter demand. Milk fat production levels are seasonally depressed in the European Union, and the strong demand has resulted in a global shortage.
Dairy checkoff’s role
Tom Gallagher, chief executive officer of Dairy Management Inc. (DMI) staked a claim for dairy checkoff research and promotion efforts for helping move the needle on milk fat consumption. He said DMI’s business plan had come together in three primary areas:
1) Two decades of checkoff-funded nutrition research is bearing fruit.
“We’ve long believed milk fat had benefits to consumers and the general population that were not reflected in government policy and health professional guidance. We were adamant of what we believed the ‘right’ story was,” Gallagher said. A turning point was when butter was featured on the cover of TIME magazine, validating dairy nutrition research that is now being recognized by government and public health officials.
2) Relationships of state, regional and national checkoff organizations with influential health professionals, such as the American Academy of Pediatrics, American Dietetic and Nutrition Association and other groups.
“It’s important those organizations respect the credibility of the National Dairy Council and the science we produce,” Gallagher said. “Without that respect, this story would have been met with much more skepticism, because it flies in the face of what the health community traditionally had thought.”
3) Work with industry partners, such as McDonalds.
Gallagher said the uptick in milk fat consumption can be traced to a DMI partnership with McDonalds, which convinced and trained the restaurant chain to convert from margarine to butter.
“That triggered a catalytic effect that convinced others within the industry to follow suit,” Gallgher said.
Vitaliano added his support for long-term human nutrition research related to milk fat, and believes the payoff to dairy farmers will continue. While efforts to move government policy on milk fat, including school milk program guidelines, will be slow, the good news is that consumers are rapidly making the switch with their purchases.
“This (milk fat) story has been moving fast in recent months, and it’s a big story,” said Vitaliano. “It’s spreading globally, and it’s affecting the dietary fat story beyond dairy.” 
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Dave Natzke
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