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After a turbulent period of dramatic price swings alongside increased demand, the international butter market is now facing the impact of the COVID-19 pandemic, which is pushing prices to challenging lows Gill Langham

Following several years of fluctuating prices, the butter trade is now facing the effects of the COVID-19 pandemic and global butter prices are currently sitting below the average for the last five years.

The upward trajectory in global dairy product prices, visible in the final quarter of 2019, stalled in the first quarter of 2020, according to a March 2020 RaboResearch Dairy Quarterly report, titled ‘The Corona Hangover’.

The onset of the coronavirus in China and the permeation across the globe had buyers and sellers scrambling to assess the market impact, the report says. As markets became more restricted, due to both difficulties in shipping and isolation restrictions put in place in the larger European countries, prices started to fall. This impacted most key dairy products, according to the UK’s Agriculture & Horticulture Development Board (AHDB).

EU wholesale markets also saw quite marked price reductions in March as the impact of coronavirus coincided with the seasonal increase in milk production, the AHBD says.

Reports also suggested that there was a significant rise in demand for packaged butter as shoppers stocked up, while there was a drop in demand for bulk butter.

Consequently, there was a shortlived rise in butter prices in early March. However, since the beginning of the year, butter prices have dropped 5% to their lowest level since August 2016, according to the AHDB.

The first notable impact from coronavirus on UK dairy markets was the effect it had on shipping. With many freight ships held up in China either quarantined or unable to load, a shortage of refrigerated containers to transport butter arose.

“As the virus spread across the world and multiple countries have imposed lockdowns, the impact on markets is becoming more severe. Companies which supply the food service industry are

particularly hard hit,” explains Katherine Jack, dairy analyst at the AHDB.

And speaking about the impact of COVID-19 on the sector, Tom Bailey, senior analyst at Rabobank, says: “The butter price has collapsed – along with other dairy commodities - due to the coronavirus. Butter prices globally have fallen around 40% through April versus last year’s levels.

“A big part of the issue is due to weakened food service demand. Around a third of US butter produced is sold or used in the foodservice industry and this is likely in other key markets like the EU. Stocks are rising and prices are falling as a result.”

Key markets

The prices of the five key dairy exporting countries/regions – Australia, the EU, New Zealand, the USA and, to a lesser extent, Argentina – have the largest influence on the sector. However, they are also affected by their internal markets, so prices can still vary from country to country.

While the EU and USA consume a lot of their dairy production as well as exporting it, New Zealand has grown its dairy industry with a focus on exports. China is also a major purchaser of dairy products while India is a large consumer but generally supplies itself.

Speaking about the growth in demand in China for dairy products, Jack says: “China, in particular, imports a lot of milk powder but exporting countries are working to develop increased interest in other dairy products like cheese and butter.

“With a growing middle class and a growing interest in western food, China and other Asian markets are seen as opportunities for dairy exports. It’s particularly a target for Oceania and New Zealand has a strong dairy trade relationship with China.”

Turbulent years

To understand why the international butter market has seen such dramatic price swings over the last few years, Jack says it is necessary to look back at the period leading up to 2015, mainly in Europe but also globally.

Prior to 2015, the EU had quotas capping milk production, which it

Consumer sentiment has changed from seeing butter as a high-fat food to be avoided, to viewing fat as not bad, with a preference towards natural products shifting demand away from margarine to butter

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removed in 2015. This was done with plenty of warning and many producers (especially in Ireland) were well prepared and ramped up production. This then led to an oversupplied market and dairy product prices and farmgate milk prices plummeted.

During this time, a lot of dairy product, particularly skimmed milk powder (SMP), was put into EU intervention stores with Private Storage Aid. Production then dropped back, restoring a degree of balance.

Meanwhile, a shift was taking place on the demand side of butter.

“Consumer sentiment shifted from seeing butter as a high-fat food to be avoided, to viewing fat as not bad, with a preference towards natural products shifting demand from margarine back to butter. Demand for butter increased and more manufacturers wanted to use it in their products – likely helped by a more competitive price at the time.

“So there was an increased demand for butter, but there was also a problem in meeting it,” explains Jack.

Since 2014 this shift in consumer sentiment led to a 7% increase in global demand for butter, according to Rabobank.

“McDonalds took a proactive step early on, reformulating to use butter instead of margarine. This change required the US dairy industry to produce more butter. This shift helped to support butter prices,” adds Bailey.

Price swings

As making butter uses the fat from milk, there is skim milk left over – most commonly turned into SMP. In the period before 2015, there was around 400,000 tonnes of SMP sitting in EU public intervention, weighing on the market and keeping prices low, explains Jack.

As a consequence, the return for turning milk into butter (and SMP) stayed uncompetitive, and processors were not incentivised to make butter unless the price of it could make up for the shortfall on the SMP side. So, prices rose and rose. There was a lot of price swing in 2017 and 2018 but, overall, butter prices were unusually high – particularly in Europe.

EU intervention stocks gradually started emptying, with the bulk being sold in 2018 and early 2019. By mid-2019 it had all been sold.

“With this weight off the SMP market, things gradually got back in balance. Now butter prices have dropped off considerably compared to 2017 and 2018, but it was those years that were exceptional, while 2019 is more normal.

“There were also some longer-term consequences to the price spikes. Many manufacturers struggled to cope with the high, volatile butter prices and reformulated products so that they would be less reliant on butter. Reformulation takes some time but means that there is now likely to be reduced demand for butter from this sector going forward,” adds Jack.

Bumper EU butter exports

Meanwhile, 2019 was a bumper year for EU butter exports, according to a report by the AHDB.

The report says that EU28 exports of butter products increased by 35% or 214,000 tonnes year-on-year in 2019. The majority of that rise took place in the latter half of the year.

In value terms, EU butter exports were worth just under £1bn in 2019, up 21% on 2018. With wholesale prices for butter falling through the year, value growth was restricted compared to volume growth.

The key growth destinations for EU butter products include Egypt, Turkey, the United Arab Emirates and the USA. Turkey imported 11,000 tonnes, more than five times the amount the EU sent the previous year. The UAE imported 12,000 tonnes, up 140% on 2018. A little under 8,000 tonnes was exported to Egypt, more than four times the amount sent in 2018. These three countries, together with the USA, accounted for half of the additional EU butter exported in 2019 compared with 2018.

The USA accounted for 17% of the EU’s butter exports in 2019, up by 7,000 tonnes on the previous year. The majority of this rise took place between April-July, following the announcement of potential US tariffs of 25% in relation to a dispute over the EU’s subsidies for European aerospace corporation Airbus. These tariffs were then made official in late October 2019, after which exports fell.

The top three EU exporters are France, Ireland and the Netherlands, which make up around 60% of the EU’s butter exports. Ireland saw particularly strong growth in 2019; exporting 63% (20,000 tonnes) more butter products than in 2019.

UK butter exports up 11%

UK butter exports to all countries (including other EU countries) totalled 693,000 tonnes in 2019, up 11% on 2018. Exports to non-EU countries were up 83% but, at 7,600 tonnes, this is a small proportion of total exports.

The UK also benefitted from increased exports to the USA, with 1,400 tonnes exported in 2019, up 1,000 tonnes on 2018.

Exports to EU countries were up 6% (3,500 tonnes). The EU remains the UK’s main butter export destination, with 89% of 2019 exports going there.

Future outlook

Even without taking into account the long-term effects of COVID-19, the dairy industry will face many challenges in the years ahead, according to the AHDB. Extreme weather events are likely to become more frequent and continue to impact production, while environmental concerns will increasingly drive consumer decisions around food choices.  Gill Langham is the assistant editor of OFI