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The surge in butter and fat prices has been cautioned by market experts.
Speaking to the Irish Farmers Journal this week, Ornua’s managing director of ingredients and trading Joe Collins said volatility in the markets has been heightened since the start of the year.
Collins said that over the last three months, European supply side factors, namely cold dry April/May weather and the ongoing policy of limited private stock holding, have combined to increase volatility further, particularly for butter.
Cold dry conditions in Europe coinciding with flooding in New Zealand further impacted milk supply, and in turn reduced butter production.
“As a result, butter prices have reached unsustainable levels as fresh supplies tightened with limited available stock to cool the market. Skim milk powder (SMP) prices remain depressed,” Collins explained.
“With regards to private stock holding, since the credit crisis in 2008, less private stock is being held in the dairy supply chain which means there is no longer a buffer against supply shortages.
“As a result, there is a greater likelihood that buyers will panic at times of fresh supply reduction to meet growing demand – as is the case with butter today.”
In contrast, Collins said that stock is typically not built in situations of supply surplus which means prices can swing violently.
“For example, over the last 12 months spot butter prices have swung by over 100% from the intervention floor to approximately €5,000/t today.”
Low SMP prices
Meanwhile, record low SMP prices due to the public stock overhang and weak global demand further discouraged butter production in quarter one 2017, Collins said.
“There are concerns that excessive butter prices will burn off domestic and export demand as retail consumers buy less and food ingredient and foodservice customers switch to vegetable fat substitutes.
“As clearly evident today, a small imbalance on the supply-demand side can have a disproportionate impact on price. However, it is also worth noting that it may reverse rapidly when supplies improve.
“The market would welcome a pickup in SMP prices and cooling down of butter prices, thereby delivering sustainable purchase prices and returns for all parties in the supply chain.”
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