Smeared on toast or melted for use in classic desserts like cookies and cake, butter is a delicious and ubiquitous condiment; it pairs well with savory and sweet foods alike. But with the dairy industry encountering production challenges and the holiday baking season around the corner, prices for butter are up appreciably — and the trend is expected to continue. 

With inflation already a major drag on the economy, diminished output — paired with elevated demand — is placing added pressure on the cost of butter. In August, for example, butter production fell 10% when compared to July, according to the Department of Agriculture. The USDA assesses the nation's stockpile by the amount of butter that producers have in cold storage.

Not only has butter volume fallen on a month-over-month basis, it's also down year over year. Indeed, volumes were down by 22% in August versus 12 months earlier, the USDA reported.

Not surprisingly, the average selling price for butter is climbing. For the week ending Sept. 24, a pound worth of Grade AA butter cost $3.17, based on the most recent data available from the USDA. That's a three-cent uptick from seven days prior, up from $2.97 on Aug. 27 and from $2.66 per pound during the first week of 2022.

Dairy cows are producing much less milk, which is placing upward pressure on food prices.Dairy cows are producing much less milk, which is placing upward pressure on food prices.

As previously noted, food costs have elevated steadily over most of the year due to a combination of factors fueling inflation, such as growth in the money supply, reduced refining activity for oil and supply chain challenges. But making matters worse are dairy cows who haven't produced as much milk. Tanner Ehmke, lead economist for dairy and specialty crops at the financial institution CoBank, told MarketWatch oppressive heat took a toll on cows over the summer, so butter producers have been drawing from less milk to make butter. With farmers forced to raise their prices, butter makers, must follow suit, trickling all the way down to the end user consumer.

Leanne Cutts, president and chief operations officer for Canada-based dairy company Saputo, said during an August earnings call that market dynamics relative supply and demand are forcing the company to re-evaluate its operations to remain competitive.

"It's clear that the milk pool has declined," Cutts said. "And therefore, we will need to ensure that our network going forward absolutely reflects this reality."

Dairy farmers challenged by rising costs
But it isn't just inauspicious weather patterns that have led to less milk. It's also a symptom of less dairy farming activity because of the high cost of doing business. Speaking to MarketWatch, National Milk Producers Federation Chief Economist Peter Vitaliano noted that diminished output happens now and then for farmers. When it does, they compensate by buying more cows. But with their food costs higher for feed types like corn silage, soybeans and grain, increasing the size of their herds would inevitably lead to diminishing returns.

Seeing the writing on the wall, some dairy producers are focusing on other products customers turn to them for, such as yogurt, cream cheese and cream. Supply Chain Dive reported manufacturers in the Northeast are devoting their resources to maximizing output of these kinds of products, which are all used more heavily during the holidays for traditional drinks and desserts like eggnog and pies.

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