Butter: The butter’s spread thin

Butter: The butter’s spread thin

Weathering the butter price storm?
Baking Business cuts through the debris to find the cause of the storm that’s left bakers and pastry chefs holding on for dear life.

Prices of butter have risen upwards of 60 per cent over the past 18 months.

But why is butter so expensive?
“It’s because consumers are returning to butter over margarine.”
“It’s because we’re exporting all our butter overseas.”
“It’s because we’re producing less milk.”

If you’ve spent any time around the water cooler, you may have heard all of these theories as to why the prices of butter have skyrocketed. While there’s a touch of truth in each, none is largely responsible for the global butter shortage we’re currently experiencing.

The truth is, the high price of butter in Australia comes down to two reasons:
1. A global shortage of butter
2. A local drop in milk production.

To understand how it all came about, let’s first take a look at the value chain.

The value chain

Butter is made from the cream of milk. Dairy farmers sell milk to processors (or you can call them manufacturers) and the processors decide what to do with that milk. (The biggest processors in Australia are Murray Goulburn, Fonterra, Bega Cheese, and Warnambool Cheese and Butter.)

Processors, depending on the size of their plant, can decide to sell the milk fresh, or turn it into butter, cream, yoghurt or other dairy products, and they base their decision on which product is demanding the best return in the current market.

So, if butter prices are through the roof, processors should be churning out butter like nobody’s business, right? This leads us to our next point.

The great skim-milk powder stockpile

When processors make butter, they separate the cream from the milk and turn that into butter. The byproduct is skim milk, and that’s usually dried into a powder. So when you make butter you also make skim-milk powder and for every tonne of butter you make, you make two tonnes of skim-milk powder.

A couple of years ago, Europe experienced an oversupply of milk. The butter created from that milk has already gone through the system, but the skim-milk powder, which has a longer shelf life, remains—and there’s a lot of it. At the moment, 400,000 tonnes of skim-milk powder sits idly on the shelves of European warehouses, and that stockpile has slashed the price of skim-milk powder, which is now at ten-year lows. In fact, the price of skim-milk powder is so low, that even though butter is returning huge amounts, it’s still not worth it for a processor to choose to make butter and skim over a product like cheese, which is far more lucrative at the moment.

But why does a stockpile in Europe affect us? Dairy Australia industry analyst John Droppert says, “We’re on a global market, so what affects the globe affects us. We only represent six per cent of world dairy trade, so we’re not big enough to drive that market; we’re sort of tossed around by it.”

John says the stockpile of skim-milk powder is the largest driver of the global butter shortage and consequent rise in butter prices. Processors are making less butter and we keep on using it—it’s really that simple.

How does Aussie milk production fit in?

Adding local fuel to the global fire is an Australian drop in milk production, which dropped by seven per cent this season. The drop in milk production also has two main sources:

1. Weather conditions
2. A drop in milk prices.

The origins of the Aussie drop in milk production also began around two years ago. Michael Harvey from Rabobank says, “Two seasons ago it was really hot and dry, and then it got really wet and that was causing problems on farms. Farmers had to deal with feed and pasture production and everything else that comes with difficult seasonal conditions.”

These conditions meant milk production was already under stress when another hit loomed on the horizon.

You might remember April 2015, when Murray Goulburn suddenly reduced the amount they paid farmers for their milk, leaving farmers out of pocket. Processors dropped the price because the global market collapsed and processors wanted to pass that loss on. As a result, farmers lost confidence in the market and lost money on their product, and milk production took a hit that we’re still feeling in 2017.

John from Dairy Australia says the seven per cent drop in milk production that we’re experiencing is adding local urgency to the global butter situation.

He says, “A lot of the manufacturers that used to have surplus product around have got less product, so bakers who are buying from wholesalers and don’t have long-term contracts, have found that the product that used to always be available isn’t at the moment.”

The seven per cent drop in milk production isn’t driving the global butter shortage, but it has exacerbated the problem here in Australia. Not only are processors deciding to manufacture higher returning products with the milk they buy, but there’s also less milk to buy in the first place.

But what about those other reasons passed around the water cooler? Michael and John gave us the lowdown.

Rising consumer demand for butter

Dietary trends promoting the benefits of fat and wholefoods have seen consumers turn toward butter over margarine as well as full-cream milk over skim. Michael says that while consumers are preferring butter over margarine, it’s not a big part of the overall balance.

“Demand’s pretty healthy, but it’s not why we’ve got this shortage of product.”

John agrees.

“People are buying a lot more butter on retail shelves and drinking a lot more full-cream milk, so the demand for butter is definitely higher and there’s drivers there as well, but the crisis has more to do with relative returns [for processors],” he says.

Export demands

John says, “Chinese demand isn’t a primary demand behind this. It’s not the Chinese coming and buying it all.”

However, he adds: “Australian manufacturers are producing a lot of mozzarella for the Chinese market—that’s the better returning product at the moment.”

“[Chinese consumers] are definitely active in dairy markets at the moment. If they weren’t buying any product then it wouldn’t be worth manufacturing anything else, so you would probably have more butter.”

In other words: yes, we’re supplying dairy products to export markets, particularly China, and maybe that’s having a small impact on the butter shortage, but it’s not a huge factor.

Is there an end in sight?

For butter prices to return to normal, those stockpiles of skim-milk powder have got to go. When they do, the price of skim-milk powder will rise, and it will be lucrative again for processors to produce butter and skim. But when that will happen is anyone’s guess.

John says, “The stockpile they’ve got in Europe’s a real problem and I don’t think anyone knows what they’re going to do with it. If it gets beyond 15 months old, and a lot of it already is, it effectively moves out of food grade and ends up being feed grade. Long term we’ll probably see more skim-milk powder and skim milk built into other products for protein fortification, but it’s probably going to stay fairly cheap for a while.”

Michael adds, “At some stage, the European commission will start to liquidate those stockpiles of skim-milk powder. If and when they do that, that will release the pressure on the skim-milk powder price.”

As for the long term, Micheal says butter prices won’t stay this high forever.

“It’s just taking time because of this unique situation where there’s stockpiles of product.

“If you look at Europe, the price of butter has started to fall because milk in Europe is going back into butter, so we’re already starting to see the effects of that. We haven’t started to see it locally in Australia just yet.”


Kareen Bonne, Lavie and Belle:
The French butter has dramatically increased. For us it’s a huge problem. We had to switch to a New Zealand butter, which is different to work with, but we really had no choice—and the New Zealand butter price is currently also increased. So we monitor the prices every week and if the New Zealand butter reaches the level of the French, we will switch again to the French one. At this step we did not increase the price of our pastries, as the idea is not to impact our customers.

Steve Anderson, Textbook Patisserie:
We’ve just recently passed the price increase on to both our wholesale and our retail customers quite simply because, especially with the croissant, danish and our pie and sausage rolls and our savoury pastry range, it erodes too much margin to be able to keep going.

Since just before Christmas last year we started going month to month, seeing who had the best price on butter. I have three suppliers. From what they all tell me, it depends on when they have secured their container or their two or three containers, what price they can then pass on to me. And that essentially determines, for a couple of months or for that month, who
I get my butter from.

Alice Lees, Baked Uprising:
This time last year we were paying $167 and now we’re paying $230 for a 25kg block of butter. We have just started using Pepe Saya for the croissants and they have absorbed part of the price rises themselves. That’s because they’ve been working very closely with very small farmers that they’ve supported them and paid more in the first place. So for the croissants, we actually haven’t seen such a large increase as the other butter that we’re using from New Zealand or Australia.

Tony Whitty, The Bread Roll Shop:
Increasing prices of ingredients and power and that sort of thing, you have to pass it on. You don’t really have much choice if you want to survive. And what we’ve noted is we don’t seem to get any flak when we do put our prices up; people seem to get it. They’re like, “Yeah, that’s fine. No worries.”


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