KANSAS CITY, MO. – Dairy product buyers can’t seem to catch a break. First it was a shortage of cream cheese before the holiday period. Now it’s butter, with CME Group prices soaring to six-year highs.
The cream cheese situation appeared to be mostly regional (Northeast United States) and has since improved. But the butter situation seems to be much broader, with an international aspect and representative of the current bullish nature of much of the dairy product market.
CME Group butter prices hit $2.84¼ per lb on Jan. 11, a six-year high. After briefly dipping below $2 a lb in late November, prices had surged 40% by mid-January and were more than double a year earlier. When freight and other costs are included, delivered prices of butter are more than $3 a lb in some cases.
“I think a lot of this is driven by tighter milk production, leaving less milk available to flow to class 4 plants, especially butter and nonfat dry milk (NDM),” said Lucas Fuess, director of dairy market intelligence at HighGround Dairy, Chicago.
Class 4 milk is used to make butter and dry products; class 3 for both spreadable and hard cheeses; class 2 for soft products like yogurt, cottage cheese and ice cream; and class 1 for beverages like fluid milk and eggnog. Excess milk not used in classes 1 to 3 tends to end up in class 4, as it is used to make storable products. The USDA determines milk pricing by class, using formulas tied to prices for four storable products: cheddar cheese, dry whey, NDM and butter.
Prices are generally highest for class 1 milk and step down with each class, but class 4 prices have moved above class 3 prices.
“There’s less fluid milk heading to class 4 plants,” said Fred Smith, president and chief executive officer of Clofine Dairy & Food Products, Inc., Linwood, NJ. “Some are off 30% to 35%. Excess cheap milk is scarce.”
He also cited increased amounts of class 1 milk going to schools and other government programs as a factor in tighter milk supplies available to processors.
The US Department of Agriculture in its most recent Milk Production report said US milk output in November dipped below the same month a year ago for the first time since February, after being nearly 5% above a year earlier in May. The number of milk cows on farms was down 47,000 head, or 0.5%, from November 2020.
Cream supplies also are tight, and prices are high. Some butter churners have opted to slow production rather than pay high cream prices, while other producers are producing as much butter as they can, considering labor and truck driver shortages related in part to a surge in COVID-19 cases.
In its Jan. 6 Dairy Products report, the USDA said November butter production was down about 10% from a year earlier.
At the same time, butter demand has remained strong, both domestically and internationally. Higher global prices have attracted buyers to the US market. The US-world price gap has narrowed, but international prices also are moving higher.
“We expect a lot of volatility in the coming weeks, but overall prices will likely be supported,” Fuess said.
Smith added, “Demand is through the roof. Everyone is short, consumption is up.”
Butter stocks in cold storage on Nov. 30, 2021, were down 16% from a year earlier, the USDA said.
Typically, demand for butter is softer after mid-December (once holiday orders are shipped), and prices are lowest in January and February, when supplies are readily available, Smith said. Currently the market is inverted with nearby prices higher than deferred values, which indicates prices may decline as the year progresses, possibly during the spring “flush,” when milk production peaks. But he expects the drop in price to be more gradual than the December-January surge.