Editorial Comment Publisher/Editor



Producing More Fat Makes Sense, And Cents, For Farmers

Dick Groves
Cheese Reporter

July 12, 2019

Over the past couple of decades, the price of butterfat, as far as a dairy producer’s milk check is concerned, has had its ups and downs, to put it mildly. But lately, trying to push butterfat production higher, and promoting butter sales, makes a lot of sense, and cents, for dairy producers.

We make that point for several reasons. First, USDA’s most recent report to Congress on the dairy promotion program (which was released earlier this year but unfortunately covers 2016 program activities) found that the producer profit benefit-cost ratio (BCR) for butter, at 22.74, is far higher than for fluid milk (4.11), cheese (4.81), and dairy exports (8.10).

As calculated for USDA’s report, the producer profit BCR is the additional industry profits (additional cash receipts net of additional production costs and promotion assessments) earned by producers as a consequence of the promotion expenditures divided by the historical level of promotion expenditures made to generate those additional profits.

So it would appear that producers would profit if promotional spending for butter were to increase, although, as USDA’s report points out, as spending increases, each additional dollar spent has a declining effect, meaning that the BCR declines as spending increases.

Second, National Milk Producers Federation reported two years ago that the contribution of milkfat to farm milk prices has risen from 38 percent for a number of years to over 50 percent since mid-2015.

Looked at in a different way, for a number of years, protein was the most valuable component in producer milk prices (at least for those federal orders that have multiple component pricing), until just a few years ago.
Just to mention one example of this: on the Upper Midwest order, protein was the most valuable component from 2002 through 2014, but butterfat has been the most valuable component since then.

With butter prices projected to remain above $2.00 per pound for the foreseeable future (through at least next year, according to USDA’s forecasts), it seems safe to conclude that butterfat will remain the most valuable component in milk for some time.

Third, it would appear that dairy producers are more than capable of boosting the milkfat output of their cows, and have not yet reached “peak milkfat” as far as milkfat percentage is concerned.

There are a couple of ways of looking at this. First, going back almost three decades, over the 1990-2010 period the average milkfat content of US producer milk fell into a narrow range of 3.65 to 3.69 percent.

Notably, over that same period, the CME cash market Grade AA butter price averaged under $1.00 a pound for several years (including just under 71 cents per pound in 1994), and never averaged higher than $1.82 per pound (the closest was in 2004, when the Grade AA butter price averaged $1.8166 a pound). So there wasn’t a great financial incentive for producers to try to boost milkfat content.

But 2010 was the last year in which the milkfat content of the US milk supply averaged under 3.70 percent. It reached 3.76 percent in 2013, fell below that mark for a couple of years, then hit 3.79 percent in 2016, 3.84 percent in 2017 and 3.89 percent in 2018. Meanwhile, CME butter prices have averaged above $2.00 per pound every year since 2014.

But it would appear that there’s still room for the average milkfat content of producer milk to move higher in the future. In the European Union, for example, the butterfat content of milk has averaged around 4 percent annually for roughly the past decade. Granted, overall production per cow in the EU is considerably lower than in the US (around 15,700 pounds in the EU last year compared to over 23,000 pounds in the US), but perhaps economically EU producers are better off producing less milk overall but more butterfat (on a percentage basis).

Fourth, dairy farmers get more “bang for the buck” from butter sales than from the sale of any other major dairy product. That is, USDA’s Economic Research Service calculates price spreads from farm to consumer, and the farm value share for butter has topped 60 percent twice over the last five years. The only other dairy product that comes close is whole milk, which has topped 50 percent over the last two years. By contrast, the farm share for Cheddar cheese was 28 percent in 2018.

Fifth, the US has in recent years become a net exporter of dairy products, but a net importer of butter. Last year, for example, the US imported almost 79 million pounds of butter and exported about 58 million pounds of butter. Just last week, we reported that, in May, US butter production fell 4.2 percent from May 2018, US butter exports declined 33 percent, and butter imports were up 87 percent. The US needs more milkfat.

Finally, we’re optimistic that, from a nutritional perspective, the news is going to remain positive for saturated fat in general and milkfat specifically, thanks in part to producer-funded research. As we report this week, a group of experts in The BMJ is calling into question the advice to reduce intake of total saturated fat, as set out in draft World Health Organization guidance. Those guidelines should consider different types of fatty acids and, more importantly, the diversity of foods containing saturated fatty acids that might be harmful, neutral, or even beneficial to health, the experts said.

Butterfat’s best days lie ahead, which means producing more butterfat makes sense, and cents, for dairy producers.


Dick Groves

Dick Groves has been publisher/editor of Cheese Reporter since 1989. He has over 35 years experience covering the dairy industry. His weekly editorial is read and referenced throughout the world.
For more information, call 608-316-3791 dgroves@cheesereporter.com

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