July 24 (Bloomberg) -- The 1,000 pounds (454 kilograms) of butter that Gerhard Michler uses every week to make cookies, cakes and petit fours at his San Francisco bakery is leaving the pastry chef with a case of ingredient indigestion.
While all his costs are up, including chocolate, none rose more than the butter used in everything Michler bakes at Creative International Pastries. Prices on the Chicago Mercantile Exchange jumped 81 percent in a year to $2.62 a pound, the highest since 1998, as surging U.S. exports eroded inventories and dairies failed to keep up with increased demand.
“There’s a shortage of butter,” Jon Spainhour, a broker and partner at Chicago-based Rice Dairy LLC, said in a telephone interview July 3. “This spring, instead of building inventories, we just shipped it out of the country. We’ve hauled a lot of product out of the market.”
Even as rising global milk output signals a slowdown in U.S. exports, tight domestic butter supplies are contributing to higher costs that buyers including Panera Bread Co. expect will last through 2014. Retail-food prices are rising at the fastest pace in three years, fueled by meat, dairy, eggs, fresh fruit and vegetables, government data show.
The spot price of butter has surged 71 percent this year, after yesterday reaching the highest close since September 1998, and butter futures on the CME jumped 58 percent, touching a record $2.50 today before dropping. The Bloomberg Commodity Index of 22 raw materials gained 2.7 percent this year, while the MSCI All-Country World Index of equities rose 6 percent. The Bloomberg Treasury Bond Index gained 3.6 percent.
U.S. butter exports got a boost after a two-year slump in prices that reached a 15-month low in August. Shipments in the first five months of 2014 totaled 38,897 metric tons, up 64 percent from a year earlier, and are on pace to exceed the full-year record of 92,300 tons in 1993, U.S. Department of Agriculture data show. Domestic production through May this year dropped 3.6 percent to 842,127 tons, while demand through April, the most-recent data available, is up 9.9 percent.
Domestic stockpiles that in May 2013 were the highest in 20 years have slumped with a surge in shipments to buyers including Saudi Arabia, Morocco, Egypt and Iran, government data show. Inventories as of June are down 42 percent from a year earlier to 186 million pounds (84,426 tons).
Rising incomes in emerging markets are driving demand for dairy products and other higher-cost foods, including meat, and the U.S. has become the world’s second-largest exporter of milk products after New Zealand.
“All major U.S. dairy-product export volumes have continued to experience meaningful year-to-date increases,” Gregg Tanner, the chief executive officer of Dallas, Texas-based Dean Foods Co., the largest U.S. milk processor, said on a May 8 conference call with analysts.
Tight butter supplies have been compounded by a seasonal decline in the fat content for U.S. milk, as warm summer months put more stress on cows. Demand for ice cream also is peaking for the year, diverting milk fats normally used in butter.
“There’s a strong demand for cream,” Eric Meyer, president of Chicago-based HighGround Dairy, said in a telephone interview. “A butter manufacturer doesn’t have to churn his cream into butter. He can sell it outright.”
Retail sales of ice cream in the year ending June 15 totaled $5.1 billion, up 1.3 percent from a year earlier, according to Chicago-based market researcher IRI. The premium for cream in the Northeast was about 49 percent over butterfat in the week ended July 18, up from 40 percent a year earlier, the USDA reported. In the Midwest, cream prices in the first three weeks of July were 65 percent higher than a year earlier.
The surge in butter may not last. Global dairy output will exceed demand by at least 2 billion liters annually through 2018, fueled by increased output in New Zealand, Europe and the U.S., Goldman Sachs Group Inc. said in a June 11 report.
U.S. butter is no longer cheaper than competitors. Prices at GlobalDairyTrade, the international dairy auction owned by New Zealand’s Fonterra Cooperative Group Ltd., fell 34 percent to about $1.43 a pound on July 15, compared with $2.15 on March 4, when U.S. spot prices were at $1.88.
“These high butter prices won’t be competitive,” especially with more supply on the way, said Ari Officer, a senior commodities trader at Traditum Group in Chicago.
The price change means importers who signed three-month and six-month contracts to buy U.S. butter probably won’t renew when those deals expire, said Bill Schiek, an economist at Sacramento, California-based Dairy Institute of California.
“We’re slowing down fat exports substantially,” said Andrei Mikhalevsky, chief executive officer of California Dairies Inc., which produces 23 percent of U.S. butter.
After record monthly shipments last year of as much as 5 million pounds of butter, the rally in prices has slowed demand, leaving the dairy cooperative “very close to winding down” all of its contracts to supply overseas buyers, Mikhalevsky said by telephone from Visalia.
Spot prices on the CME probably will drop to $1.89 by the end of the year, while futures slide to $1.86, according to a Bloomberg survey of five analysts.
“Let’s hope we get some relief once these butter contracts run out,” said Michler, 57, the San Francisco chef who made 110,000 cookies, bars, desserts and tarts in June that he sold to local restaurants and retailers. Michler said he is paying about $2.80 a pound now, up 49 percent from a year ago, forcing him to raise prices by as much as 3 percent.
“It’s very unusual that it increases in the summer months,” he said. “There’s usually more production.”
Prices may remain high if unusually hot, humid U.S. weather keeps dairy output from rising as expected, said Knox Jones, an Omaha, Nebraska-based dairy analyst for Advanced Economic Solutions. Rising demand and prices for cheese also may divert more milk away from butter making.
Domino’s Pizza Inc., the second-largest pizza seller in the U.S., said July 22 that a 24 percent jump in cheese-block prices eroded profit margins in the second quarter.
Retail butter fetched $3.04 a pound on average earlier this month, up 20 percent from a year earlier, the USDA reported on July 10. Domestic demand will rise to 788,000 tons this year from 782,000 tons in 2013, the agency projected.
Consumers have increased butter purchases for five straight years, partly as some shift away from margarine. Sales of prepackaged butter in the 52 weeks ended July 5 rose to $2.3 billion, up 5.9 percent from the same period ended in 2013 and 36 percent higher than in 2010, according to data from New York-based market researcher Nielsen NV.
Until prices drop, there are few alternatives for Sandra Holl, owner of Floriole, a bakery and cafe in Chicago. She’s paying 39 percent more than in January, a “scary” jump in costs.
“There’s so much butter in everything we make,” Holl said. “It’s the most expensive thing, but it’s also what makes everything good.”
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