Butter extends rally, as GDT prices defy whole milk weakness

07.06.2017

Butter prices took nearly to one-third their gain at GlobalDairyTrade this year, echoing gains in other markets, fuelled by ideas that milk output in the key European market has fallen short of expectations.

Prices overall at GlobalDairyTrade rose 0.6% at Tuesday's event, nudging to their highest in nearly three years, reflecting the recent trends of returning Chinese interest, and the hangover on milk production from the price downturn which lasted from 2014 to 2016.

The gain defied a 2.9% decline in prices of whole milk powder, the most popular product traded at the auction, which fell to an average of $3,143 a tonne, taking back below $1,000 a tonne its premium over skim milk powder.

Indeed, skim milk powder values soared 7.9% from the previous event to average $2,156 a tonne, with whole milk powder's underperformance blamed in part on an announcement by Fonterra, the dairy giant which runs the auction, of an increase in forward volumes to sell.

Extra powder

Fonterra – which processes the vast majority of milk in New Zealand, the world's top milk-exporting country - last week revealed it was raising by 10,000 tonnes the volume of whole milk powder it would sell through GlobalDairyTrade (GDT) over the next 12 months.

"The changes have been made in response to favourable pricing driving product mix towards whole milk powder and expectations of increased milk collection in the 2017-18.

"More whole milk powder will be manufactured across the peak of the season and an appropriate proportion of this increase will be offered through GDT."

The relative performance of skim and whole milk powder prices also echoes China's import performance, with the country's buy-ins of skim milk powder up by nearly 9% in the first four months of this year, while those of whole milk powder are down 1.4%.

'Moving relentlessly upward'

However, the rise in the GDT index at Tuesday's auction also reflected a further, 3.3% gain in values of butter, which has far outperformed milk powders so far this year.

Butter values at GDT are now up 31% in 2017 to $5,631, by far their highest level on data going back to 2012.

The increase reflects gains in other markets too, with June butter futures on the CME exchange touching 247.95 cents a pound on Monday, the highest for a spot contract since late 2015, and taking gains for this year to 17.5%.

The US-based Milk Producers' Council said that the increase reflected European butter prices which "are moving relentlessly upward", amid ideas that milk output in the EU has not seen as large a spring "flush" as had been expected.

"European merchants are hesitant to offer much butter, preferring to keep stocks on hand for later this year," the council said, noting that US butter supplies too had seen only a modest spring stock build, a factor "which could lead to tight supplies this fall".

'Dramatic changes'

In the UK, the AHDB bureau noted in a market report for May that "butter started the month at around £3,750-3,800 a tonne before rising towards levels of around £4,800 a tonne".

While EU dairy markets had started May with "some stability… dramatic changes occurred and prices shot up.

"It would appear a number of buyers were expecting some price decreases, on the back of EU flush milk.

"However, lack of available stocks and lower-than-expected milk production across most of the EU caused buyers to cover off short-term requirements."

EU milk output squeeze

Latest official data on EU milk production, for the January-to-March period, and so covering only the start of the spring flush, show output falling by 2.3% year on year.

The decline included at 4.4% drop in German output, 4.2% fall in German volumes, and a 3.2% shrinkage in UK production.

Ireland's output was 1.1% higher, with Polish volumes gaining 3.5%.

The EU is by a distance the top producer of butter among the major dairy exporting countries, although on shipments it lags behind New Zealand.


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