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Butter price surge may 'prompt fundamental market change' - Arla

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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 revival.

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 year.

"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 change'

"The change is driven by low or non-existing butter stocks and an increasing consumer trend and demand for richer dairy products," Mr Tuborgh said.

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 with us'

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 stronger'

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 news.

"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 price forecast

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".

By Mike Verdin

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