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COMMENTARY: Why Does Butter Cost So Much?

By Shirley Ferris

There is much discussion around the dairy case in our local grocery stores

these days. The high retail cost of butter over the past several months has

folks muttering about dairy farmers, figuring they are somehow responsible for

this higher price.

Local dairy farmers are benefiting from the current high price of butter, but

not nearly as much as the retail price might indicate. Farmers benefit when

the "blend price" goes up. The blend price, about 50 percent of the milk

check, is driven mostly by supply and demand for processed dairy products such

as butter and cheese.

The current retail cost of butter is high because of a shortage of butterfat,

particularly in the United States, but also around the world. There are

several reasons for this, but the two most important are weather and food

trends. National policy in regard to food storage also plays a part.

Weather: A major drought in California and the Southeast (and the Midwest to a

lesser extent) and floods in Texas caused a severe loss in products fed to

dairy animals and other cattle. This led to dramatic increases in the cost of

feed. Many farmers sold their cattle or fed them a much lesser amount, which,

of course, led to lesser quantities of milk, leading to a dramatic decrease in

the supply of butterfat.

When processors of dairy products realized there would be a shortage -- and

with the holiday season coming -- they purchased huge amounts of butterfat,

depleting all storage supplies.

As with any commodity, when the supply is low and demand is high, the price

increases.

Food trends: Americans prefer lowfat milk. However, the world market for milk

demands volume.

American dairy farmers tend to raise animals of a breed that produces high

volumes of milk with lower butterfat content. That is why the Holstein (black

and white) cow is so prevalent. Dairy farmers that produce more exclusively

for the "processed market" will tend to raise Jersey (small brown animals)

that produce lower volumes of milk, but with very high butterfat. More Jersey

cows can be seen in northern New England, the midwest and Europe. Processed

dairy products include butter, cheese and yogurt.

Food storage policy: In the past the government has stockpiled dairy and other

commodities in great volume in something called the Credit Commodity

Corporation (CCC), to offset any adverse effect in case of national disaster,

such as war, contamination, weather or other conditions.

In an effort to lessen the tax burden on the American public, the government

no longer stockpiles large amounts of food commodities. A certain amount is

still stored, according to a number determined to be sufficient for use by the

American military, world food aid programs, and senior and school meal

programs, to name a few.

Cost for storing any amount over that predetermined rate is charged to the

producer of the product. This charge is called the "CCC payment". For example,

individual dairy farmers are assessed a certain amount per hundred weight of

milk produced for any amount of product stored over the determined need

number.

This policy has been beneficial to both the taxpayer and the farmer in that it

forces producers to look for markets other than the government for "surplus"

product. Export programs have been accelerated.

This worked fine until weather conditions created a crisis in butterfat

supply. Because the government no longer stores vast amounts of butterfat,

processors had no choice but to go on the open market for their needs.

Processors then handed down the premium they are paying to the consumer.

Price Drop Predicted

Dairy economists are predicting there will be a dramatic drop in the blend

price in January or February and will continue through the spring.

Fortunately, for New England dairymen, the Northeast Interstate Dairy Compact

will be in place until October 1999 and will hold up the price paid for Class

I product -- fluid milk.

Here is how that works:

There is a price system set by the federal government according to Federal

Milk Market Orders. Think of this as a minimum wage. This price varies across

the country based on a whole gamut of production, marketing and other

statistics. In New England it generally runs less than the southeast, about

the same as the midwest, but a little higher than the far west.

The Northeast Interstate Dairy Compact adds an over-order price to the federal

price -- but only on fluid milk. (There is no relationship between the Compact

and the price of processes product). This goes up and down depending on the

"utilization rate", the amount used by consumers in the form of fluid milk.

Think of the compact price as a "COLA", the cost of living adjustment that is

part of nearly every salary package.

The utilization rate is around 50 percent. Therefore, the price to farmers who

market milk to the New England area will receive the compact price for about

50 percent of the milk check. This system stabilizes the price for both farmer

and processor and should be reflected at the retail level.

The remaining 50 percent is the aforementioned "blend price" which moves

according to the supply and demand system for processes product.

It has been said there are only two people in the world who understand how

dairy pricing works -- one of them died and the other is lying. At any rate,

the whole program is currently under review and USDA Secretary Dan Glickman is

under Congressional charge to come up with a revised pricing program in

October 1999.

So, yes, the dairy farmer is doing better today than he was in 1995 when about

50 Connecticut farmers threw in the towel. But even with this current upward

movement, the farm price hovers near what it was 20 years ago. Only innovative

pricing and marketing systems will sustain the dairy industry to the benefit

of our neighbors.

(Shirley Ferris of Newtown is the state commissioner of agriculture.)