In our last market update we reported of prices easing and a period of relative stability in the dairy industry. Wishful thinking! All the usual logic that says the start of milk production should bring lower prices has gone swiftly out of the window due to an unprecedented shortage of butter. This is due to a huge demand from consumers which has led to a severe shortage of butterfat. We were hopeful that 2017 would see the period of relative stability being maintained after the huge price volatility over 2H 2016.However this has proved to be an illusion as butter prices have reached record levels and other dairy products are fast on its heels.

Signs of trouble started to emerge in March with a slight increase on the butter price when
all other dairy commodities appeared to be flush on supply. However nobody was braced
for the levels of increase on the butter price witnessed shortly after that. Today’s price is
approaching the €6000/ton mark which is truly astonishing and smashes the previous record
price. This has inevitably led to other dairy commodities following suit as most processors
are diverting milk into butter production to take advantage of the lucrative high returns on
offer.

We reported in our last market update that demand for butter was increasing and Unilever
had even gone as far as selling off their margarine business. Consumers have recently
turned back to butter due to the general scepticism towards processed food. The increase in
demand has caught processors off guard as they have failed to maintain adequate stocks to
fulfil their customers’ requirements. The rise of the butter price is extremely alarming for
manufacturers who rely on butter as a staple component of their finished product. It is
difficult to imagine the current prices staying at this level for the long term but there are no
immediate signs of prices easing.

Image courtesy of www.arla.com

Another major reason for prices not easing in the immediate future is the rise of the milk
price paid to farmers. The average EU milk price is now 25% higher than this time last year.
While this may seem a very significant increase, many farmers rightly point out they were
receiving relatively poor prices for several years.

They are finally starting to see a fairer price but it is still lagging behind the high prices dairy
commodities are currently trading for in the marketplace. The sky high price of cream and
butter will also put huge pressure on processors to keep increasing the milk prices
throughout the summer.

As mentioned, other dairy commodities have followed butter’s lead with price increases
across the board. Cheese prices have been significantly affected too with Mild Cheddar and
Mozzarella prices increasing by around €500/ton and still climbing. Even Gouda and Edam
have started to follow suit with similar increases in price after 3 years at very low levels after
the Russian trade ban with the EU in 2014. Mature Cheddar stocks are also reported to be
very tight and the volatility may also be prolonged due to the higher cost of producing
today.

There is a feeling that the high prices will be maintained over the next few months due to
the unprecedented demand situation. There is no great appetite to replace butter with
substitute products despite the huge jump of price. Therefore demand for butter will
remain very high and it will take a huge flush of milk to alleviate the pressure. Milk volumes
in the UK and Ireland are actually looking very promising due to favourable weather
conditions but it is not looking so healthy on the continent with milk volumes down in most
regions. The UK & Ireland will not be able to provide a milk flush for the whole of Europe so
we may be in limbo for several more months.

While it is a positive that the farmer milk suppliers are getting higher returns for
their product we must say it is a shame our customers have to endure severe price increases
yet again. We thought we were over the worst of it after the drama in 2H 2016 but this
proved to be unfounded.

All we can say to reassure our customers is that we didn’t let
anyone down on stock even through the milk supply crisis of last year and we have no
intention of that changing. We are proud of our reputation as a dairy supplier you can rely
on even through the most challenging of times. We can also offer stability by fixing prices
over Q3 so our customers do not have to worry about suffering any more price volatility
during that time period.

Thank you once again for your patience and understanding of the difficult situation we find
ourselves in. We wouldn’t be where we are today without your continued support and we
will keep our end of the bargain by providing high quality product with a dedicated
customer service focus.

Yours Sincerely,

Ian Galletly
Managing Director