WORLD – The stage appears to be set for a continuation of elevated butter prices, with shipments from the two top exporters expected to flatline next year, thanks to stagnant production.
Combined exports of from New Zealand, the biggest shipper, of butter and anhydrous milk fat, which is made by a similar process, will rise by only 2,000 tonnes in 2018 to 519,000 tonnes, the US Department of Agriculture’s bureau in Wellington said in its first forecast for next year.
In the European Union, the second-ranked shipper, butter exports will not rise at all, holding at 185,000 tonnes, USDA bureaux in the region said.
With the EU and New Zealand between them responsible for more than 80% of world butter exports, the forecasts hint at a continuation of the market conditions which have sent prices of the product to record highs, and boosted values of other dairy fats too.
Constrained milk output growth
The forecasts reflect expectations of flat butter production in both origins – at 2.32m tonnes in the EU and 545,000 tonnes in New Zealand – in part down to expectations for limited milk output rises.
Milk output in New Zealand, the top dairy exporter, was seen rising by 0.5% to 21.62m tonnes, thanks to some renewed growth in the dairy herd, but remaining some 270,000 tonnes below the 2014 high.
An “increase in confidence is likely to mean some farmers will increase cow numbers slightly”, the bureau said.
In the European Union, milk output was forecast expanding by just 0.1% to 156.4m tonnes, on an assumption of a small shrinkage in the dairy herd, but better productivity of cows retained.
Skim milk powder factor
And, despite elevated butter prices, other dairy products retain financial appeal for processors thanks to the weak values of skim milk powder [or non-fat dry milk], high in protein, also thrown off by the butter manufacturing process.
“Dairy processors face a dilemma whether they should take advantage of current high butter prices and risk building commercial stocks of non-fat dry milk, or choose less risky cheese production, which uses both milk fat and protein and remains in continuous demand on the world,” the EU bureaux said in a report.
“Non-fat dry milk may have a hard time finding a profitable outlet because of huge stocks built in 2016 and 2017 within EU’s market intervention programme,” with inventories estimated at some 380,000 tonnes, a large weight on world market values.
The briefing forecast that “2018 butter production will remain at the same level as 2017, primarily because increased raw milk output will be directed into production of cheese”.
‘First call on fat’
In New Zealand, the Wellington bureau said that “the world continues to be oversupplied with skim milk powder and international prices are languishing at the bottom of the price cycle with no end in sight for the near term”.
The bureau also flagged growing competition in the fat complex from UHT [long-life] liquid cream, “a high value product tailored by New Zealand processors for food service businesses in Asia especially China”.
New Zealand exports of liquid cream this year may hit 90,000 tonnes, three times the volume shipped five years ago.
“In a year where milk supply growth is relatively constrained, then higher value cream production has the first call on milk fat over and above butter and anhydrous milk fat.”
‘Continued shortages of butter’
The analysis tallies with a caution last week from Dairy Australia that the EU’s huge skim milk powder (SMP) inventories “will likely be a source of instability in dairy commodity markets going forward, and be a source of continued divergence” between protein and fat prices.
“So long as uncertainty around the EU’s intervention stocks [of skim milk powder] continues, SMP prices will remain low.”
This will supress “total returns from the SMP/ butter manufacturing stream below that of alternative streams such as whole milk powder and cheese, meaning that less butter will be made, in turn leading to continued shortages of butter and higher butter prices”.