The surge in dairy fat prices, which has taken butter values
to record highs on some markets, could spark a "fundamental market change" for milk
processors, co-operative giant Arla Foods said, forecasting a continued dairy market
Peder Tuborgh, the Arla chief executive, termed the rally in values of milk fats as the
"key driver of positive developments in the global [dairy] market", which has seen
values at GlobalDairyTrade auctions, for instance, rebound by 70% over the past
"For the first time ever, fat is more valuable than protein,"
with growth in values of the likes of anhydrous milk fat and butter far outpacing
those of protein products, such as casein.
The overall rise in the GlobalDairyTrade index conceals a cast
difference between the performances of butter values, up 52% over the past year,
and those of rennet casein, down 6.9%.
'Will prompt a fundamental
"The change is driven by low or non-existing butter stocks
and an increasing consumer trend and demand for richer dairy products," Mr
Many consumers, while demonising sugar as health risk, have become
more open to fats, at a time when butter supplies have been constrained by
concerns over prices of skim milk powder, which is also typically thrown off by
the butter production process.
Skim milk powder prices have fallen by 11.5% at
GlobalDairyTrade over the past year, weighed by a huge build up of inventories
in Europe, through intervention buying.
If fat continues to assert its premium, "it will prompt a fundamental
change in the dairy market and in turn our production and product management",
Mr Tuborgh said.
Arla itself has in recent years focused on products
including whey, a dairy protein, which has proven a profitable line, used for instance
in infant formula.
'Butter bubble still
In fact, butter prices have begun, at GlobalDairyTrade,
which is run by New Zealand dairy giant Fonterra, to ease back from the record
high of $6,044 a tonne reached last month, dropping 4.3% since.
However, prices are still rising in the European Union,
growing by 2.7% over the past two weeks to $7,026 a tonne, the European
Commission said on Thursday.
"The butter bubble is still with us," said Tobin Gorey at
Commonwealth Bank of Australia following the commission report.
Bank of New Zealand said that in milk fats "strong demand,
much of it seemingly structural, faces limited supply".
Indeed, the commission briefing highlighted the squeeze in
international supplies of butter, showing shipments from New Zealand, the top
exporter, down 10% in the first half of this year to 220,000 tonnes, and those
from the EU itself, ranked second, falling 19%.
'Should be even
Arla's comments came as the group unveiled a 54% tumble to E112m
in earnings for the January-t-o-June half, reflecting largely a boost to
results a year ago from asset sales.
Gross profit eased a more modest 1.4% to E1.14bn, reflecting
a 3.4% rise to E5.02bn, but against a backdrop of rising milk costs, which Arla
said it expected to continue.
"We expect the positive [milk] price trends to continue," Mr
Tuborgh said, flagging increases already announced by the co-operative for milk
prices from July-to-September.
"The improving [dairy] market conditions, driven by increasing
fat values, particularly in Europe over the recent months, are indeed good
"The second half of 2017 should be even stronger and we
anticipate that both sales and consumer prices, as well as milk volumes, will
increase in the months to come."
Bank of New Zealand
Bank of New Zealand said earlier in the week that it was
forecasting a decline in dairy prices ahead.
But - in raising by NZ$0.75 per kilogramme of milk solids to
NZ$6.75 per kilogramme of milk solids its forecast for the price earned by
Fonterra's New Zealand farmers – it said that the pace of decline looked like
being slower than had been expected.
"We have essentially pushed out the timing of the expected
drift lower in international dairy prices," seeing whole milk powder prices,
currently at about $3,150 a tonne, "drifting down to toward $3,000 a tonne over
the coming nine months or so".