There are encouraging signs. After touching a peak of almost €7,000 a tonne in September, butter futures traded on Germany’s EEX have lost about a quarter of their value. Analysts cite a simple commodities adage for the drop: “The cure for high prices is high prices.”
“What we’re seeing is high prices choking off demand,” says Kevin Bellamy, global dairy strategist at Rabobank, a Dutch lender with a large agricultural business. Consumers have begun to look for alternatives and food companies are reformulating their recipes, he adds.
In most markets the price increases have been passed on to consumers. In the UK for example, September’s butter Retail Price Index showed one of the highest monthly increases in recent years, rising 6.5 per cent from the previous month and up by a fifth from a year ago.
The origins of the supply squeeze that sent butter prices from €4,450 a tonne at the start of the year to its September peak reflects the worldwide dairy glut of 2014 to 2015. The fall in prices that followed forced dairy farmers to cull their herds last year, while others went out of business.
Milk production in the world’s big exporters started falling in early 2016 and only recovered in the second quarter of this year.
While butter’s slide from its recent record has been sharp, commodities analysts say the supply-demand dynamic for the soft commodity will ultimately keep a floor under prices.
China has started to import again after their inventories dwindled, while India has also been an active buyer of international supplies, says Chris Gooderham, dairy analyst at the Agriculture and Horticulture Development Board, which is funded by farmers and growers.
It comes as the recovery in the herd levels in the EU has been slow in the region’s leading dairy producers, including Germany and France, while the number of dairy cows in the Netherlands has been curtailed by environmental regulations.
“The response [to high prices] from the supply end has been a little bit muted,” says Mr Gooderham.
Rising demand for cheese is also proving helpful for butter prices. Dairy companies have the choice of turning milk into butter and skimmed milk powder, cheese or whole milk powder. A worldwide glut in skimmed milk powder, which is produced alongside butter, means that returns on cheese for farmers has been higher than those from the combination of butter and skimmed milk powder.
This has helped lead to “low or non-existent butter stocks” according to Arla, the dairy company behind butter brands Anchor and Lurpak. Few expect this dynamic to change soon.
There is a “lack of incentive to move milk out of cheese vats,” says Rabobank, which predicts butter prices of $6,000 a tonne this quarter and $5,800 a tonne in the first quarter of next year.
Then there’s the outlook for demand. Although rising butter prices have restrained demand, there are still plenty of tailwinds for consumption. Demand for butter has risen after the link between butter and cardiovascular disease was questioned. Publicity over the potential adverse health effects of some vegetable oil-based spreads has also prompted a switch back to butter. In the US, for example, butter consumption per person has grown 16 per cent since 2010, according to USDA data.
“There has been a shift back to ‘natural’ products,” says Mr Bellamy of Rabobank.
Any sigh of relief that prices are now on a sustained downward trend is likely to prove premature.