No.1 butter brand in Germany
26% year-on-year revenue growth
2014 opened with prices close to the record highs that had been achieved in 2013. Excellent returns and output conditions, combined with relatively low input costs, stimulated milk output to a very significant degree for much of the year.
Milk supply volumes surged across the world’s major dairy producing regions; the EU alone adding over 6 billion litres to its output, the US and New Zealand another 3.5 billion between them. The pattern of increased supply was clearly seen closer to home. Milk supplies in Ireland were up approximately 4% on the previous year, while in the UK, growth was even stronger at 9%.
The greatly increased supply proved to be more than global demand could absorb, and prices fell heavily from the Spring, with dairy commodities losing as much as 50% of their value by year-end.
Demand weakness was evident in dairy’s two most important import markets, Russia and China, but for very different reasons.
Political difficulties closed the Russian market to EU and US dairy trade from August, depriving Europe especially of an outlet for product which in previous years had accounted for more than 30% of cheese exports and 28% of butter. As this product struggled to find new buyers, prices fell.
In China, massive over-purchasing of whole milk powder in late 2013/early 2014 led to a stock-build of, by some estimates, as much as a year’s worth of import requirements. This over-buying was driven by fears in China over security of supply (arising out of drought-related scarcity experienced in late 2012/early 2013) and by speculative purchasing as prices rose dramatically in 2013.
The realisation of large stock-build by market actors, coupled with greater domestic and international availability of product and lower demand (due to high pricing) caused a sudden and dramatic collapse in buying from the end of the first quarter. Chinese buyers are not expected to re-enter the market in a meaningful way until mid-2015, once surplus stocks have been run down, and domestic demand recovers.
The return of these significant buyers will be very important in providing a sustainable lift to market prices in the year ahead. Despite these negatives, there were also some important positives to note on the demand side in 2014.
Butterfat demand reached a 40 year high in the US, and had a very welcome lift in Europe as a more positive consumer attitude took hold (backed by a healthier understanding of the nutritional aspects of butter versus alternatives), and a trend towards home-baking gained ground.
This return of butter’s popularity was epitomised by its appearance on the cover of Time magazine in June, accompanied by an article declaring an end to the ‘war on fat’. The end of the year brought some early signals that the dairy market was beginning to stabilise and pick up, although from very low levels.
A weakening Euro added to European export competitiveness vis-a-vis the US and New Zealand, and buying activity picked up as customers sought to replenish stocks with low-priced product. This pick up in prices is in some part due to an anticipation of reduced global milk and product supplies in 2015 although the abolishment of EU quota from 1st April will support increased flows within Europe. We await to see if this will be the case.