The causes of the butter price rally are becoming clearer.
Values of the dairy fat have soared this year, by 27% in
Chicago, 53% on Europe's EEX futures market, and by 34% to a record high at the GlobalDairyTrade
auctions run by New Zealand-based Fonterra, the world's top dairy exporter.
As to why, full explanations for the price surge have been
harder to come by.
But the two prime movers of the rally are now becoming
evident – a mixture of European Union dairy policy, and the same mindset which ditched
the likes of tight-fitting nylon trousers, mullet haircuts and expansive shoulder pads.
'Butter is better'
… that is to say, a change in fashion, such as that which
ditched the parachute pants popular in the 1980s, beloved indeed by breakdancers, and which has now promoted
sugar to public health enemy number one.
"Consumers have reached a consensus - dairy is a tasty,
natural source of fat, and the low-fat fad of the 1980s and 1990s deserves to
go the way of parachute pants and windbreakers," said the US-based Milk
"Butter is better, and the whole world knows it."
And this when butter production "is not keeping pace with
demand" both in the US and elsewhere, creating a void in export supplies which saw
US shipments, for instance, hit 6.4m pounds in June, the highest in nearly
The primary cause of the output shortfall is where EU policy
steps in, and the intervention buying aimed at supporting milk prices, and thus
the bloc's dairy producers.
As Martin Richenhagen, the German-born chief executive of
tractor-maker Agco noted a couple of weeks ago, intervention buying is focused
on skim milk powder, for warehousing reasons.
"They basically usually turn everything into low-fat powder,"
Mr Richenhagen told investors.
"And the reason why they do low-fat is storage. If you have
too much fat content, it can't be stored as long."
'Not throwing off
Indeed, the fat is typically processed into butter.
But this butter supply tap has been turned down with a
reluctance by EU dairy producers to manufacture skim milk powder, in the face
of price pressure from the huge overhang of EU stocks, of some 350,000 tonnes.
Skim milk powder prices are down 25% so far this year at GlobalDairyTrade.
The European Commission is "having a very hard time moving [skim
milk powder] at prices that they think are acceptable", said Chris Bellairs,
finance director at US dairy giant Dean Foods.
"So what that's done is it disincentivised everyone from
making more powder. When you're not making more powder, you're not throwing off
The upshot is that "a lot of the milk production on a global
basis has now turned toward cheese production, and fat has gotten very
expensive as a result of that", Mr Bellairs said.
Unfortunately for Dean Foods, which supplies more than 30%
of drinking milk in the US, the rise in fat prices has only added to the
problems of company laid bare in a profit warning on Tuesday, blamed largely on
strengthening competition, and a focus on milk in supermarkets' price war.
(Walmart, one of Dean Foods' largest customers, is opening a
plant in Indiana which will shift some 90m-95m gallons of milk business from
the processor over 2018 and 2019.)
Dean Foods, whose shares tumbled 21% on Tuesday, is
attempting to offset its headwinds in fluid milk by expanding into other
markets, such as ice cream, where its volumes rose 9% in the April-to-June
However, with butterfat a key ingredient for the ice cream operations,
"higher-than-expected butter prices… are driving up input prices versus our