Farm Ireland

Saturday 17 March 2018

Fat to protein imbalance is the only blot on the horizon

Farmers boosted by upturn in milk prices, but butter shortage could spell trouble, says Kevin Bellamy

Rising butter prices are already driving some consumers towards cheaper fat sources
Rising butter prices are already driving some consumers towards cheaper fat sources

Most people would agree that the situation of the dairy industry is a vast improvement on where we were last year.

The European Commission estimate that the average farm-gate price paid to Irish dairy farmers in August was 35.24c/l - that's an upwards move of over 30pc from the same time last year.

Based on the current value of dairy products, many suggest that there is room for even more upward movement in the months to come.

This upturn in prices has stemmed from the dairy market's continued adjustment following the removal of milk quotas in 2015.

In the period leading up to and then following milk quota removal, dairy farmers across north-west Europe expanded production, and as a result oversupply of milk caused prices to fall. The fall was exacerbated by reduced buying from China and the Russian trade embargo.

In the second half of 2016, milk prices had fallen so low that many farmers across Europe were forced to cut back production, and the market started to re-balance, and prices began to rise again.

The subsequent recovery of prices has been further fuelled by the return of China to the international dairy market - on course for a 20pc year-on-year increase in imports in 2017.

Further good news is that while many farmers in Europe have been forced to cut back production, the lower cost of production, and the efforts of co-operatives to support prices, meant that Irish dairy farmers have continued to grow production, with 6.6pc more milk produced in the first half of 2017 than was the case last year.

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More milk at a higher price - like I said, "a vast improvement".

But we also need to look forward. It's certainly true that looking at the value returned from products such as milk powder and butter today, there is scope for further upward movement of farm-gate milk prices.

It's also true that the modest increase in production from Europe and the likely increases in production stimulated by higher milk prices in New Zealand will balance with the extra volumes demanded by the market. So no problems there then.

But, as usual the world is not so simple. The increases in production seen leading up to, and following, the removal of milk quotas has masked an extraordinary consumer trend away from eating margarine and towards eating butter.

Food manufacturers have also moved in the direction of butter as consumers demanded more 'natural' foods.

Proof of this trend, if needed, is provided by the fact that during the recent period of oversupply of milk, dairy protein prices had to be supported by public buying of skimmed milk powder, while butter prices remained well above the 'safety net' zone.

Interestingly, while demand and prices for butter have been rising, the low price of dairy protein has meant that often for dairies, the most profitable use of milk has been to make cheese rather than butter and milk powder.

The outcome? A shortage of butter, with butter prices at above €6,000 per tonne, compared to nearer €3,000 per tonne just a year ago.

Meanwhile, the still-growing 360,000+ tonnes of milk powder, bought by the Commission to support market prices, sits in the stores, slowly aging and overhanging the market prices.


At the end of September, the European price support window comes to an end (at this time of year there should be no need). As a result protein prices could fall further, and to compensate butter prices would need to rise further.

But high prices are already choking off demand among some consumers, and further price increases will see food manufacturers driven to reformulate use to cheaper fat sources.

Luckily for Irish farmers this will happen in the slack production months - and it will be next season that any price effects will be felt.

Of course, over time we can fix the 'fat to protein' imbalance. We can feed cows on diets which encourage them to have more creamy milk. We can breed cows that produce more butterfat.

As the current trends appear to be global - note the recent trade spat between Canada and the USA on just this subject - we should probably start that process sooner rather than later.

Kevin Bellamy is global head of dairy at Rabobank.

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