Consumers swerve record butter prices, for nowA supply shortage combined with rising demand has sent wholesale prices to a record high
Europe is in the throes of a butter shortage.
Rising demand and a decline in milk production has led to a doubling in the price of the dairy spread this year. French bakeries want to raise the price of pastries, brioches and croissants that are dependent on butter, while the chief executive of Arla, the company behind the Anchor and Lurpak dairy brands, last week warned UK consumers that there would not be enough butter at Christmas.
The strains in Europe have global origins. The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization.
“Limited export availabilities of dairy products in all major producing countries” led to significant rises in dairy prices, including butter, the FAO said this month.
The current supply shortage and ensuing rally in the butter price follows one of the most sustained periods of low dairy prices since world markets crashed in 2007-08. Favourable weather and the EU’s move to liberalise its dairy market in 2015 depressed prices.
They more than halved between 2014 and 2015, with many dairy farmers around the world going out of business or struggling under increased debts. The EU responded by introducing voluntary output cuts and compensated farmers for not producing milk. World milk supplies from leading five producer regions slipped 0.4 per cent in 2016.
In the southern hemisphere, bad weather in Australia and New Zealand has left production so far this year lagging that of 2016.
Consumption of butter, on the other hand, continues to grow. Kevin Bellamy, global dairy strategist at Rabobank, the Dutch lender, believes there has been a “structural shift” in demand patterns for the dairy spread.
That helped limit the drop in the price in 2014 and 2015 when supply was robust. “People are moving towards butter, putting more of it in manufactured food,” he says.
Recent studies have also cast doubt on the link between butter and cardiovascular disease, sharpening consumers’ enthusiasm. Bad publicity over the potential health effects of some vegetable oil-based spreads has also prompted consumers to switch back to butter.
Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.
Despite the rise in butter prices, “many farmers don’t have the ability to increase output,” says Patty Clayton, a senior dairy analyst at the UK Agriculture and Horticulture Development Board, which is funded by farmers and growers.
Nor do record prices mean dairy farmers and companies can simply shift their production to take advantage, as they also have to supply retail customers with fresh milk, cream and cheese. “Milk producers have to prioritise their long-term customers,” Ms Clayton says.
The current shortage would have been less severe if there were inventories available to fall back on. However, the robust demand has eroded global stocks. Moreover, China is back in the market buying dairy products including butter and cheese, says Mr Bellamy of Rabobank.
Despite the rise in the wholesale prices of butter, retailers and food manufacturers have been reluctant to pass on increases to consumers. However, analysts expect that to change as margins are squeezed.
“Given the recent inflation in butter prices, if that continues, that is going to be reflected in consumer prices,” cautions Ms Clayton, who predicts the price will remain under upward pressure for the rest of the year with production unlikely to rebound in the short term.
“Butter prices will come back but it may take several months, but it will not go back to original levels,” Mr Bellamy says.
Many dairy farms in Europe and Brazil are suffering from a shortage of young cows to bring into the herd after the years of sluggish dairy prices.
“Because of the period of prolonged low prices the young stock aren’t there,” he adds.
