The Butter Market – Spreading To New Heights!

We’re used to commodity price variation being dramatic for products such as cocoa or oil. However, one of the unexpected trends in recent months has been the amazing increase in the price of butter.

An article last week on the Spend Matters US site, written by Nick Peksa of supply analytics firm Mintec, highlighted this. “At the end of May 2016, European butter futures had established a new monthly record for futures traded, with 1,382 butter contracts having been established. This phenomenon is not just confined to Europe; there has been an increased demand globally for all types of fats (people trending toward anti-sugar and organics).”

The global market price of butter has close to doubled since early 2016, from under $3,400 per MT to over $6,150 per MT — again setting new price records.

I’ve got some personal experience of this market; my very first job in purchasing was as Dairy Products category manager for Mars Confectionery, way back at the dawn of time. Some of you may remember the “butter mountain” in the 1980s, when the European Union bought up surplus at a fixed price and stuck literally thousands of tonnes of butter into storage.

I still have some involvement today (outside Spend Matters) with a firm that has connections in the dairy market, so have followed the recent price movements with interest. Butter obviously comes from fresh milk, but it is a more complex supply chain and market than you might imagine. Taking the basic raw material, you can sell it as full milk, or skimmed, you can extract the fat for butter or AMF (anhydrous milk fat) which is what many manufacturers use, as it is easier to handle than butter – you can transport it in tankers, for instance.

Then there is cream and cheese, the most amazing foodstuff ever invented (how come cooked cheese tastes so different from uncooked – and why is it so delicious?). And that’s before we get into yoghurt, whey, milk proteins and other esoteric products.

So the economic decisions that different players in the chain make in terms of what they do with liquid milk are quite complex. If more butter is made, then there might be a glut of skimmed milk. And the consumer view is playing a major role here. After many years of being told that margarine was healthier than butter, it now looks like the opposite might be true. The many “bake-off” TV programmes have also driven home baking and butter consumption, and increased sales of strawberries is probably driving cream uptake!

Demand for dairy products is also growing in the developing world. Countries such as China have become largely self-sufficient, while (interesting  fact alert) India is the biggest producer of milk in the world (if we include buffalo milk).

Then there is the weather. During the spring “flush” when grass grows fastest, and the cows graze on the lush pastures, milk supplies consequently increase. The dry spring in the UK probably led to supplies being lower than expected, which may have had some impact on local markets.  However, there are self-correcting mechanisms. Consumers will buy less when prices rise, with variable price elasticity for different products.  Farmers, seeing a better return for their product, tend to buy or breed more cows, but there is an obvious lag, so there is every chance we will see over-supply next year.

We suspect prices won’t go much higher, but in truth your guess is as good as mine.  It just goes to show that markets are wonderful and fascinating phenomena, and even something as everyday as butter can have its moment in the spotlight.

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