Es muss Butter sein. Ich kann nicht glauben, dass es nicht Butter ist.
Shouldn't this be "This is butter"?
Das is used for this, that and the. Only way to figure out the exact meaning is the noun form surrounding it and the context.
In this case, this is butter is correct too
Hard to tell from the German sentence. Can be both. I learnt to use this for closer things and that for those further away.... But das/dies can be used in both ways. There is still jenes, which is exclusively that, but it's not commonly used...