Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
Is there a correlation between butter inventories and butter prices? It would seem obvious that there is.
We know that our government ordered everyone to shelter-in-place last Spring to stop the spread of the virus. This order – done with the best of intentions to save the health care delivery system – had profound effects on the economy across the board. Suddenly the grocery store channel was overwhelmed (with consumer-sized packaged butter in high demand) as the institutional food delivery infrastructure, with its heavy dependence on bulk butter supplies, essentially shut down. Then Congress, in an unprecedented show of unity, unanimously passed the CARES Act, providing TRILLIONS of dollars to government agencies to use to address the economic impacts of the pandemic.
USDA was allocated billions of dollars, and to their credit, put together some highly creative and effective programs to get relief to producers and people who needed food. BUT, the impact of those programs was not evenly distributed. This is not surprising, and no one should be overly critical of USDA for what they did under extremely difficult circumstances.
Nevertheless, for the dairy sector, massive government purchases of cheese for the Food Box program did do a lot of good for hungry people and for some producers, but now as we look forward there are some realities that linger that have a significant negative impact on the ability of the market to normalize the relationship between the various class utilizations of milk.
The Bulk Butter Bulge is one of those circumstances. Looking at the data indicate that butter inventories increased in the Spring, coinciding with the pandemic shutdown. The butter inventory continues to run about 50 million pounds ahead of normal. 50 million pounds is not that much, but when it is an extra 50 million pounds, clearly its price impact is significant.
Current butter prices in the $1.40s is likely to continue, and is at least $0.50 per pound lower than it otherwise would have been. That 50 cents per pound represents over $2.00 per cwt. that would be reflected directly in the Class IV and Class II prices, and partially in the Class I and even Class III prices. It is a big deal.
USDA did announce a Section 32 butter purchase recently. While this is positive, early indications are that the purchase is not of bulk butter, but of consumer sized packages of butter, which have never been in surplus. And the purchases are spread out over all of 2021. This is not near enough to address the butter bulge problem the government caused by shutting down the economy.
There are apparently conversations and even specific proposals that are being made to USDA and other government officials now about how to address this very real dairy problem. So far, this has not resulted in any action that will address it. Hopefully, there will be some positive response soon.