Butter Boom! or Bakery Bust?

Butter consumption recently hit a 40-year high, driven by a rise in domestic demand coupled with a surging export market.  Not surprisingly, butter prices recently hit a 16-year high driven by these two dynamics.

Robust domestic demand for butter?  Have American’s forgotten about cholesterol, the heart-disease inducing villain absent in margarine and other processed oils?   Or has the transfat fascination created a preference for saturated animal fat?   How is one to know how such crosscurrents might play out?  Were there any indicators that might have helped us foresee this butter demand surge?

Anuja Miner, Executive Director of the American Butter Institute, has suggested that the Food Network and celebrity chefs may be driving this trend.  Many top culinary experts consistently praise butter highlighting its richer taste and better cooking characteristics, and this may be at least partially responsible for the shift away from margarine toward butter.  Imagine that…paying attention to TV shows to get ahead of market-moving trends!

The global demand story is one based on the global consumption boom I see coming as the emerging market middle class population balloons.  Dairy is just another component of that same story, with US shipments to Saudi Arabia, Morocco, Egypt, and Iran surging.  In the early 2000s, US exports of butter were effectively non-existent.  According to NPR, roughly 10% of butter produced in the United States today is exported.

So what?  The seemingly irrelevant dots that we’ve connected suggest that butter prices, TV shows, celebrity chefs, and emerging market growth can help us glean a bit of the future.

1)   Butter may merely be reflective of an underlying dynamic that affect dairy prices in general.  As such, seemingly irrelevant information on the dairy trade may give us insight into economic developments before they transpire.  The world’s largest dairy exporter is New Zealand and the largest importer is China.  Just as Australia was a country tied to China’s investment boom, could New Zealand be a leveraged play on China’s consumption boom?

2)   Although dairy prices will surely rise and fall over any one or two-year period, we are likely on a long-term trajectory of higher and higher prices.  This has big implications baked goods retailers like Panera Bread (PNRA), coffee sellers like Starbucks (SBUX), pizza companies like Papa Johns (PZZA), ice cream companies like Ben & Jerry’s, cheese users like Kraft (KFT), etc.

Perhaps it’s time for global strategists and analysts to reconsider the 1980s commercials featuring the tub of Parkay that regularly whispered “butter.”  There is insight in butter!