January 11 – 2019 – Vol. 16 – Issue 1
Market Matters Has the Global Butterfat Bubble Burst? World butter prices hit an alltime in 2017, before trending lower industry was illprepared to accommodate consumers’ swift and settling into what appears to be a new higher price range. reaction to the news, a demand change occurred that was For instance, in July 2017, U.S. CME spot butter prices climbed to reminiscent of growth in U.S. ethanol. In 2007, President George $2.735/lb. at 80% butterfat, or $5,882/metric ton (MT) on an 82% W. Bush announced he would sharply raise the mandate for butterfat equivalent. Likewise, EU butter prices reached a high ethanol use in motor fuels, setting a 2017 floor for ethanol seven near €7,000/MT in September 2017. In late December 2018, EU times larger than 2007 output. Without sufficient supplies of corn butter was near €4,600/MT. With butter prices roughly 35% to meet food and feed demand as well as the new fuel mandate, below their peak, some wonder whether the butterfat bubble has corn prices soared to encourage more corn production. Each year burst or whether today’s lower prices reflect a seasonal decline as production increased, corn prices decreased until they reached and could once again stage large increases in the 2019 demand a point where supply could meet the new demand. season. EU per-capita consumption showing a demand shift Shifting consumer preferences and the loss of a substitute 5,0 10 product began lifting global butterfat demand in 2014. The change agent was a preliminary finding by the U.S. Food and Drug 4,9 9,5 Administration (FDA) in November 2013 that partially 4,8 9 hydrogenated oil (PHO), or trans fats, was not “generally 4,7 8,5
(in billion pounds) recognized as safe” for use in food. Margarine, once made 4,6 8 primarily from PHO was also the main substitute for butter. 2014 2015 2016 2017 2018 E (in pounds per year) Around the same time, the clean eating trend took off, and food companies and restaurants began shifting out of trans fats and Est. Comm. Disp. Per Capita Consumption into butter, ahead of a potential mandate from FDA. Source: CLAL
No Longer the Enemy A bubble has occurred when the price of an asset has significantly In June 2014, Time magazine’s cover story, “Eat Butter— exceeded its intrinsic value often based on implausible views of Scientists labeled fat the enemy. Why they were wrong,” the future. The butter bubble started in the United States in 2014 suggested dairy fat was maligned by a poorly conducted and culminated in Europe in 2017. Collectively, the EU28, United experiment in the 1960s, which led to significant declines in per States, and New Zealand produced 2.3% more butter in 2017 capita consumption in the following decades. The article also than in 2014. In addition, growth in demand for competitively highlighted more recent studies that disputed earlier findings priced vegetable oils and fatfilled milk powder, a substitute for linking consumption of saturated fats with heart disease. Across whole milk powder that consumes milk protein while generating the Atlantic in 2015, the European Commission released a report butterfat, further increased butterfat supplies. Improved that concluded that the risk of dying from heart disease was 20 availability of butter and a pushback on demand, especially from 30% higher if just 2% of a person’s daily diet consisted of trans oilrich markets as crude oil prices weakened, helped ease 2018 fats compared to those who consumed dairy or vegetable fats. prices. This suggests recordhigh prices could be in the past—
barring any unforeseen price spikes caused by supply outages or After decades of dwindling butter demand, the global dairy substantial increases in demand beyond current levels.
Hoogwegt Group. Adding vision and value. January 11 – 2019 – Vol. 16 – Issue 1
Hoogwegt Forecast U.S. Average Prices EU Average Prices Oceania Average Prices Did You Know? $/ton $/lb Trend $/ton $/lb Trend $/ton $/lb Trend SMP 2.205 1,00 Firm 2.225 1,01 Firm 2.225 1,01 Firm While India exported butter to both the FCMP/WMP 3.530 1,60 Frim 3.250 1,47 Stable 2.775 1,26 Firm United States and Saudi Arabia in 2018, Butter 5.115 2,32 Stable 5.250 2,38 Firm 4.200 1,91 Firm the country has not been a consistent Cheddar 3.285 1,49 Stable 3.500 1,59 Stable 3.400 1,54 Firm world supplier and only looks to global SWP 1100 0,50 Stable 1.150 0,52 Firm Lactose 770 0,35 Stable 1.100 0,50 Firm markets in times of surplus supply.
U.S. prices stated exworks / incl. expected CWT subsidy where applicable; world prices stated By October 2018, global trade in butter FOB main port; EUR/USD: this week 1,155 and anhydrous milkfat had recovered to just 7% below peak trade, which occurred World Comment two years earlier when prices were only about 5560% of recent levels. The New Year started off quite bullish for most of the dairy products. First GDT tender of the year ended with and average price increase of 2.8%. SMP and BMP went up most (8% and The Global Dairy Trade butter price 9%). New Zealand valorization is now in favor of the combination SMP – Butter/AMF, so we peaked at $6,026/MT on Sept. 19, 2017, could expect a bit less WMP in the upcoming shoulder of the season. In Europe a record and then dropped to a low of volume SMP was sold in the most recent Intervention tender; about 80.000Mts. Brussels clearly wants to get rid of the stocks quick and now ‘only’ 2025.000Mts are left in $3,637/MT on Nov. 20, 2018. Government hands. In Europe main driver of higher prices is the bit lower than expected milk production combined with strong exports. As well in USA NFDM CME Futures moved up about 10ct/lb (USD220/Mt) in the last 30 days, mainly due to strong demand from Mexico. At the moment it seems many buyers realize market is not going to soften in coming months and are looking for more coverage for first half of 2019. Global milk production for 2019 is not expected to exceed 2018 strongly and with Global Economy still doing fairly well, we could expect prices to remain fairly strong for the rest of the year, however upcoming flush in Northern Hemisphere could cool down markets a bit.
Bring it Home What’s Next for World Butter Prices? High butter prices were effective at keeping supply and demand was in flux at the start of 2019. Dwindling stocks of government in balance through most of 2018. Recent price declines could test held SMP have started to lift global SMP prices. Higher milk whether the industry is generating sufficient butter to satisfy powder prices coupled with butter prices in the $4,000/MT range demand or whether moderating prices could encourage a could encourage dairy producers in Europe and the United States resurgence in demand as butter becomes more affordable to the to produce more milk to meet world demand for butter. masses. It is too early to tell whether the butter bubble has burst, or whether low prices will curtail output and spark demand—just New Zealand, the world’s largest exporter of butterfat, is a swing like they have several times since 2014. supplier in world markets. The country is also the largest supplier of dairy products to China. Growing demand for butterfat in In Europe and the United States, half of the annual milk solids China, as well as Southeast Asia, could pull enough New Zealand produced are used in cheese and whey production, a trend that is butterfat out of the world market to shift demand yet again. But unlikely to change. This suggests that when milk production for now, the world butter market appears to be in relative slows, as it already has in these two regions, butter and milk balance, suggesting a demand shift has already occurred and powder plants could be deprived of milk solids—a prospect that butter markets are now trading in a new range. is concerning to global buyers at the start of 2019. In recent years, an overabundance of skim milk powder (SMP) has complicated the need for additional butterfat. But that too