It is easy to get discouraged when you see a story about the price of butter going up. With money pouring into the economy from the Federal Reserve’s “quantitative easing” program, prices get destabilized. Food and energy are especially prone to surging.
So when I saw the headline about butter becoming a new luxury item, I was appalled. I thought we were seeing another price surge. Once again Fed policy was making it harder to survive.
But that doesn’t seem to be the case. In fact, the headline about butter becoming a luxury good is contrary to what the story is really about.
Here’s how the story from Quartz begins:
The fact that Americans have stopped vilifying butter and embraced its full-fat role as part of a “wholesome, “natural” diet is perhaps old news by now. Earlier this year, we learned that US butter consumption officially hit a 40-year high in 2012, and that hardly anyone eats margarine anymore. Butter converts might not have considered, though, what would happen if the dairy industry couldn’t keep churning out enough of it out to meet demand?
The amount of butter stored in refrigerated warehouses across the US is 42% lower this summer than last, according to the USDA […]. On Aug. 29, butter futures reached an all-time high of $2.55 per pound on the Chicago Mercantile Exchange.
Not only did US cows produce less milk than expected this year, but the fat content of that milk was lower than usual, reports Bloomberg. That lack of inputs for making butter or cheese is pushing prices to new highs. Now companies like Dean Foods to Panera Bread are feeling the pinch as they spend more to keep up with customers’ demand for these dairy products—as are companies that make margarine, such as Unilever.
So, while the flow of new money is probably distorting the price of butter, a milk fat shortage combined with much higher demand is the major contributor.
Presumably the shortage will be fixed next year, but what are we to make of the higher demand?
First of all, it means it is nonsense to say that butter is becoming a luxury good. The higher price is not coming from a few rich people. Lots of people are buying more butter and, thus, driving up the price. That is the opposite of a luxury good.
Secondly, even when money is tight, as it has been during this “recovery,” people are still capable of sacrificing lesser goods for those that they want more. Perhaps fewer people are going to McDonald’s so that they can afford more butter (that would be my personal story, though I have no idea how prevalent it is). In fact, this shows that the people are defying the incentives provided by government, which subsidizes corn and wheat and, as a result, has induced a flood of cheap foods that are probably related to diabetes and other growing problems in the U.S. (I am not a doctor nor a nutritional scientist; you will need to do your own research to arrive at your own opinion.) Enough people have concerns about their health that they have noticeably affected the market.
And what about Michelle Obama? She said that moms were confused and bewildered in the grocery store so that they needed better guidance from food labels. But the market doesn’t show us noticeable confusion. It shows us people who disagree with her and who have, despite economic difficulties, expressed their preferences with their pocketbooks. Instead of the low-fat directions from the government, they are looking for sources of food that are high in fat.
If you believe that fat is good for you, then this spike in butter consumption is really good news. Furthermore, the increased demand means the relative price will probably come down. As the Dairy industry makes more money off butter, more resources will be diverted to capturing those profits. As more competitors enter the industry, the price of butter will begin to get lower.