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11 Sep 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Dairy Market Blog – 11th September, 2017

How high will butter prices go?

Severe shortages of butter have developed around Europe, especially for the food processing/food services trade, and prices have continued to lift beyond historical levels with little or no prospect of additional supplies for the short term – what with being past Northern Hemisphere peak, not yet at Southern Hemisphere’s, and with reports that the wet spring may be affecting volumes in New Zealand.

French bakeries have been vocal about the shortages and the price pressure, with reports of 10c price increases on croissants in many of them.  Croissants are made with around 25% butter, so the impact is significant.

The shortages (and the price uplifts) appear less noticeable in the retail trade, where traders have reported resistance to wholesale and retail price increases.

From early May 2016 todate, average EU butter prices have increased from €2500/t to €6390 – a whopping 155% or 2.5 times increase.

Based on EU MMO data

Dutch spot butter prices on 6th September came in at €6950 – within touching distance of €7000/t.

So, just how sustainable are these very high butter prices?  Well, probably not for the medium to long term, even if they are maintained for the next few months by supply shortages.

Industrial purchasers of butter, in the face of very high prices, will at some point consider re-formulating their recipes to use vegetable oil, as the already sizeable differences in price is growing with butterfat price inflation.  Also, as stated previously, while butter retail prices have increased, they have not increased in proportion to the wholesale prices.

So, why have butter prices risen so much so fast?  First, there has been generally less milk produced internationally this year than was earlier expected.  Second, the price of SMP (the “companion” product made with the same milk as butter) has been depressed, so when butter prices were less high, the balance of the two products did not pay processors.  Third, hot weather around Europe this summer has increased ice cream and cream consumption, leaving less for processing into butter.

The manufacture of both SMP and butter in Europe is well down.  For the first half of 2017, over 10% less SMP was made, and over 6% less butter.

Source: EU MMO

As a result, returns from EU commodities as reported by the EU Milk Market Observatory for 3rd September, despite lower SMP and WMP prices, have risen slightly further, to just above 41c/l before processing costs.

Returns continue to justify price increases

Assuming a 5c/l deduction for processing costs, this is equivalent to just over 36c/l + VAT based on the data recorded for 3rd September (see table below).

Of course, this does not necessarily reflect the returns obtained by Irish co-ops in real time.  Some of their contracts will return more or less for some commodities.  However, it is an indicator we follow on an ongoing basis, and it has clearly tracked the fact that strong butterfat prices continue to make up for lower SMP prices.

Based on EU MMO data

Irish butter and SMP prices as reported to the EU MMO for the same date (3rd September) were both below EU levels – below intervention levels in the case of SMP at €1660/t (intervention buying in price in €1698/t) .  However, combined with the EU average prices for the other commodities, the gross returns before processing costs are just over 40c/l – equivalent to a milk price of 35c/l + VAT

Comparing the Irish milk price paid for July with some of the European indices show there is some scope for continued increases – even if the Dutch spot milk price and the LTO league are based on a butterfat level of 4% or slightly higher.

Note: Dutch spot price is ex factory, constituent levels vary

International August/September/October milk price round up

  • Dutch Friesland Campina has lifted its September “guaranteed” price 2c/kg to 40.50c/kg to reflect market returns and the price evolution from its main European competitors;
  • Arla have already announced a 1c/kg increase for September milk, citing also the fast rising butterfat value.  For British member suppliers, this will be equivalent to a price of 30.79p/l (33.00c/l at current exchange rate);
  • Also in the UK, First Milk increased their September price by between 1 and 1.1ppl, to levels of up to 29.05ppl (31.6c/l).   Meadow Foods have announced a 0.85ppl price hike to 30ppl for October milk; Muller also increased their October milk price by 1ppl to 30ppl (32.6cpl);
  • In France, where price increases have been relatively slow until now, largest milk purchaser Lactalis has increased its September A price to 36c/l, following an August price of 35c/l, and a July milk price of 34c/l;  The regional price for A milk in East Brittany for September and October has been confirmed at 33.7c/l.
  • German milk purchaser DMK +2c/l for August to 38c/kg;
  • Further afield, in New Zealand, ASB Markets predict that the stronger butterfat value could lead to an increase in the Fonterra 2017/18 forecast to NZ$7/kg (around 30.4c/l).

 

 

CL/IFA/11th September, 2017

 

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