Butter

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 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 or swung 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 US. 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 has been linked to obesity and heart disease. Per capita consumption of butter in the US in 2000, the latest reporting year, was 4.6 pounds, little changed from 1980 but sharply lower than 7.5 pounds in 1960 and 17.3 pounds in 1930. The primary substitute for butter is margarine, which is produced from vegetable oil rather than milk fat. US per capita consumption of margarine has risen from 2.6 pounds in 1930 to recent levels near 8.3 pounds, much higher than US 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 – Butter futures traded in a relatively narrow range early in the year, generally between $1.15 to $1.20 per pound. Butter then staged a sharp rally late in the year to post a new 2-year high and closed the year at $1.36, up 14% from the 2002 close of $1.19. Butter rallied late in 2003 and early in 2004 on concerns about mad cow disease and whether that would result in the slaughter of a large number of cows thereby cutting milk production. Butter also benefited from the general rally in commodity prices seen in late 2003 due to the weak dollar and stronger US economic growth.

Supply – US production of butter in 2003 fell to 1.253 billion pounds, down from 1.360 billion in 2002. World production of butter in 2002 rose to 6.121 million metric tons, up from 5.737 million metric tons in 2001. India is by far the world’s largest producer of butter with 42.5% of the world’s production in 2002. After India, the world’s largest butter producers are the US with 9.5% of world production, France with 7.4%, New Zealand with 5.6%, and Russia with 4.7%.

Demand – US usage of butter in 2003 fell to 1.192 billion pounds from 1.293 billion pounds in 2002.

Trade – US imports of butter in 2003 fell to 31.73 million pounds from 34.80 million pounds in 2002, accounting for a meager 2% of US usage.