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How to react to soaring butter prices? Dairy Crest hacks ad spending

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How should dairy product sellers react to soaring butter prices?

The UK's AHBD bureau last month came up with three options. Aiming its advice at retailers, the bureau said they could "increase retail prices, work with their suppliers to absorb the additional cost, or a combination".

On Tuesday, butter maker Dairy Crest came up with a fourth – simply to curtail sales volumes.

The UK spreads-to-yoghurt producer said that "we have reduced our promotional activity on Country Life", its leading butter brand, as advertised by former Sex Pistols singer John Lydon.

While "adversely impacting volumes", this strategy "mitigates some of the margin pressure" provoked by rising "butter input costs", Dairy Crest said.

"Cream prices, which determine input costs for the butter business, have increased substantially" during the April-to-June quarter.

Soaring butter values

The comments came hours ahead of a further rise in butter prices, which crossed $6,000 a tonne to a fresh record high at GlobalDairyTrade, the twice-monthly auction run by New Zealand dairy giant Fonterra, whose own brands include Anchor butter.

Butter prices gained 3% from the previous auction to $6,004 a tonne, taking headway so far for 2017 to 40%.

Over the last year, prices have more than doubled, from $2,687 a tonne in mid-July 2016.

Skim milk powder vs whole

Butter proved the most buoyant product at the event although, crucially, whole milk powder, which accounted for more than half volumes sold, edged 0.3% higher to $3,114 a tonne.

That rebuilt premium over skim milk powder, which dropped by 3.2% to $2,024 a tonne, back above 50%, although this represented the last auction before an expected drop in volumes of the product for sale, with Fonterra ditching sales of its Australian skim milk powder through GlobalDairyTrade.

The withdrawal "is a result of the new state-of-the-art cheese plant recently opened at the Stanhope factory", in Victoria.

"The new facility significantly reduces SMP [skim milk powder] availability as milk is moved to higher returning cheese products, including parmesan, gouda and mozzarella, for Australian consumer, foodservice and export markets," Fonterra said.

The decision cut by 7,200 tonnes the volume of product sold through GlobalDairyTrade over the next year.

Production vs demand

The jump in butter prices has been attributed to an increase in demand from importing countries, at a time when a milk output slowdown has constrained growth in exporting nations.

Last year, "butter production in the key exporting regions was flat, as reduced production in the US and Oceania negated higher production in the European Union," said the AHDB.

"During this time, wholesale prices in the EU and Oceania rose by 50% and 44% respectively, while import volumes from the main buying nations rose by 26%."

'Seems to have stalled'

However, there are signs that in Europe, the extent of the butter price rally, combined with the dent to export prospects from a strong euro, may be sending importers to other origins, and weakening the pressure for further rises in values.

The US-based Milk Producers Council said that Europe's "butter market seems to have stalled at record highs".

The US Department of Agriculture said on Tuesday that US exports of butter had, at some 3m pounds, "remained weak in May", despite the international demand.

However, although "recent US wholesale prices for butter have been substantially less than prices of competing exporters, they have been competitive for only the last two-to-three months.

"It usually takes several months of persistent gaps between US domestic prices and foreign export prices to impact exports."

By Mike Verdin

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