KANSAS CITY — The US butter market is shifting from a period of abundance to scarcity, but this isn’t a story about logistics, shipping delays or pandemic impacts. This is a good old fashioned supply story. High feed costs earlier this year, and rising costs for nearly everything else, have pushed margins lower for dairy farmers. They have reacted by reducing the size of the dairy herd by 85,000 head, which is almost 1%, between May and September. The reduced milk production is resulting in less butter production and we’re drawing inventories lower, which is pushing butter prices higher, and they likely have even more upside in 2022.
Most of the “balancing” of the milk supply falls to butter and milk powders like nonfat dry milk (NFDM). Milk production is very seasonal, peaking in the spring and falling in the summer before bottoming out in the autumn and starting to rise again. But dairy consumption patterns don’t line up with the season increases and decreases in milk production. To ensure we have enough milk around in the summer months, we effectively overproduce in other months. That excess milk gets turned into storable dairy products like cheese, butter and milk powders which can then be used when milk production dips down.