The Fat Demand Conundrum
Demand for dairy around the world has continued to grow in the first half of 2017. Global imports of dairy products were up 1.5% for the first five months of the year compared with last year. To put this into perspective, this 1.2 billion pounds of new milk being consumed, is equal to roughly one month of Idaho’s milk production. Dairy prices were nearly 50% higher year on year over the same period, which has not helped bolster demand. Instead, it has been strong economic growth that has helped to drive this increase in imports. After a somewhat lackluster outturn in 2016, IMF indicates the pace of global economic growth has quickened in 2017 to 3.5%, up from 3.1%. Asian markets remain the core to growth in developing markets and in dairy while the U.S. and the European Union (EU) also performed above earlier forecasts.
Milkfat demand has grown, complicating life for processors but boosting the milk price for farmers. It was more than three years ago that Time magazine marked the beginning of the butter trend with their June 2014 cover featuring a dollop of butter and the headline “Eat Butter.” At the time of the release butter prices were at $2 per pound. Three months later butter prices had soared to $3 per pound as Americans and food service businesses ditched margarine for the real stuff. Today, strong demand for milkfat in the form of cheese, butter and whole milk maintains buoyancy in butter prices. The U.S. butter price per pound actually sits the lowest among worldwide peers (U.S. $2.60, EU $3.10, New Zea- land $2.70) due to continued milk supply growth while the EU and NZ both are shifting out from a contraction phase.
Meanwhile much of the global milk protein market is oversupplied. 350,000 MT of skim milk power (SMP) remains in intervention which the EU commission is yet to sell. It is unlikely the product will be shifted onto the market in a non-price distorting manner, which is the commission’s objective. The impact of Canada’s Class 7 milk price can also be felt as Canadian exports of SMP increased 280% so far this year. With the excess protein on the market and a short supply of milk fat, processors face the conundrum of making butter but being left with SMP/NFDM. This will be problematic for manufacturers until the global dairy industry is able to change genetics to favor high milkfat yielding cows, which could take years.