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- CRB Fundamentals - 2008 Commodity Articles


Butter is a dairy product produced by churning the fat from milk, usually cow's milk, until it solidifies. In some parts of the world, butter is also made from the milk of goats, sheep, and even horses. Butter has been in use since at least 2,000 BC. Today butter is used principally as a food item, but in ancient times it was used more as an ointment, medicine, or illuminating oil. Butter was first churned in skin pouches thrown back and forth over the backs of trotting horses.

It takes about 10 quarts of milk to produce 1 pound of butter. The manufacture of butter is the third largest use of milk in the U.S.. California is generally the largest producing state, followed closely by Wisconsin, with Washington as a distant third. Commercially finished butter is comprised of milk fat (80% to 85%), water (12% to 16%), and salt (about 2%). Although the price of butter is highly correlated with the price of milk, it also has its own supply and demand dynamics.

The consumption of butter has dropped in recent decades because pure butter has a high level of animal fat and cholesterol that have been linked to obesity and heart disease. The primary substitute for butter is margarine, which is produced from vegetable oil rather than milk fat. U.S. per capita consumption of margarine has risen from 2.6 pounds in 1930 to recent levels near 8.3 pounds, much higher than U.S. butter consumption.

Futures on butter are traded at the Chicago Mercantile Exchange (CME). The CME's butter futures contract calls for the delivery of 40,000 pounds of Grade AA butter and is priced in cents per pound.

Prices - The average monthly price of butter at the Chicago Mercantile Exchange in 2007 rose by +16.0% to 137.27 cents/pound. That is still down from the 2004 record high of 181.66, but higher than the 12-year low of 110.59 cents posted in 2002.

Supply - World production of butter in 2007 rose +5.5% yr/yr to 7.420 million metric tons, which is a new record high. The world's largest producers of butter are India with 46% of the world production in 2007, the European Union with 28%, the United States with 9%, New Zealand with 5%, and Russia with 4%. Production of creamery butter by U.S. factories in 2007 rose +4.7% to1.516 billion pounds. That was the highest level since 1962.

Demand - U.S. usage of butter in 2005 (the latest data available) rose by +0.7% yr/yr to 1.335 billion pounds. That was only about two thirds of the usage levels of over 2 billion pounds seen back in the 1930s and 1940s, illustrating the downtrend in U.S. butter consumption. Per capita consumption of butter in the U.S. in 2004, the latest reporting year for the series, was 4.6 pounds per person per year, little changed from 1980 but sharply lower than the 7.5 pounds in 1960 and the 17.3 pounds back in the 1930's.

Trade - U.S. imports of butter in 2005 (the latest data available) fell sharply by -37.9% yr/yr to 31.42 million pounds. U.S. butter exports in 2004 (latest data available) rose +201% to a 6-year high of 26 million pounds.

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