Butter prices on spot commodity markets have reached record highs in recent weeks causing panic in the supply chain.
In the last 12 months spot butter prices have jumped 160% from the Intervention floor with 70% of this increase occurring in the last two months to reach record levels of c. €6,000/t.
The previous record was €4,100/t for two months in late 2007. Most of the price increase can be explained by the low unsustainable starting base of Intervention, supply reductions and strong demand. The remainder of the price increase can be attributed to panic buying by large food ingredient customers who were operating with low stocks because they budgeted to buy butter at a “fair value” price of €3,600/t in late 2016.
Supplies have been impacted by lower milk output in Europe since June 2016 and a reduction in the butter fat content of milk. In addition, increased volumes of cream are being used in applications like full fat milk, ice cream, dips, yogurt and high fat cheeses thereby curtailing volumes for churning. In contrast, SMP (a by-product of butter) pricing has remained depressed in the last 12 months with prices today at €1,850/t which is just 15% above the Intervention floor.
In late 2007, SMP traded at €3,600/t or 88% of the butter price compared to 34% today. This product price mismatch has also discouraged processors from making butter as the cent-per-litre (CPL) returns are impacted with strong butter returns being negated by lower SMP returns. In summary, the butter/SMP combination is struggling to attract additional milk.
Demand for dairy fat has been grown strongly in the last three to five years. Dairy fat is now acknowledged as being a naturally, healthy and tasty food while its substitutes (e.g. margarines) are been viewed as less healthy, processed and not always produced sustainably. In the quest for flavour consumers are switching to dairy and meat fat at the expense of sugar. The positive trend towards dairy fat that started with butter in the USA/EU retail sectors has now moved to other dairy products (e.g. cream, milk and cheese), markets (e.g. Asia) and sectors (e.g. food service).
While the retail price of butter has increased, it only partially reflects the spot price increases.
Butter brand owners’ margins are being impacted and they are extremely concerned about long term brand damage and the potential for reduced demand burn as consumers trade down to own label, lower quality brands and margarine. Food service and food ingredient customers are in crisis mode, particularly in baking sectors.
They are unable to source as normal from processors and traders with butter costing 60%-80% more than budgeted. Some are looking to dairy substitutes to survive as consumers buy smaller quantities. Many traders (a vital component to a functional market) are concerned as they sold forward in anticipation of normal butter market and are now exposed. Some will not survive and there will likely be bad debts for processors.
Milk processors across Europe are unhappy due to lower milk/fat supplies while low SMP returns are putting pressure on CPL returns at a time when farmers expect higher returns based on spot butter prices. Indeed, some processors are cutting milk prices (France and UK) to reflect product mix and forward contract commitments which are the mainstream for the prices returned to farmers.
In summary, the spike in spot butter prices in recent months carries risks within the supply chain which could have long term consequences. The market would welcome a rebalancing of fat and SMP protein values as this would be more sustainable for all the parties.
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