Rising Butter Prices: A Tough Cookie for the Cookie Industry

The current situation of exploding butter prices is all a result of good news. Until about three years ago, butter was considered health-enemy number 1. Yet, when science made its U-turn, consumers followed suit. After years of declines, the demand for butter is now growing 2 percent a year thanks to consumers’ quest for all natural ingredients and some bad press for margarine.

picture of wheat harvesters

That growing demand alone can’t explain the sky-rocketing butter price. After all, higher prices are the best cure for high prices. One might expect the supply side to step up production to meet higher demand as it did over the past years, but that mechanism is failing now.

There are currently four barriers keeping supply at bay:

1.      Limited availability of milk – the EU subsidy scheme to lower milk production has prompted reduced supply in Germany and France. Consequently, this year’s milking herd in Europe shrank by 0,2 percent in 1H and, although higher prices will bring more milk in the second half (against a weak last 1H year), production will rise by no more than 0,5 percent in total this year.

2.      Lack of demand for Skimmed Milk Powder (SMP) – dairy can be processed into a variety of products but generally the choice is between producing butter and SMP or cheese and whey. The decision to produce more butter is not just based on the butter price. It is also directly related to the market outlook for SMP and the prices of cheese and whey. While butter prices are sky high, the low values of SMP mean the returns on butter/SMP and cheese/whey are pretty similar, so dairies have no incentive to produce more butter (see this figure by the European Commision).

3.      European processing infrastructure has focused on cheese – the dairy processing facilities in Europe are skewed to cheese processing, which a) explains the preference for cheese rather than butter production and b) may hinder a sizeable production shift to butter in the short run.

4.      The import of butter is hindered by import duties and a taste difference between the Lactic/cultured butter we use and the sweet cream butter used in other markets.

Moreover, EU price support mechanisms led to high levels of public stocks of SMP. These intervention stocks are still hanging over the market and, as a result, our dairy colleagues expect SMP prices to remain depressed for the coming six to nine months (link to Q2 quarterly). SMP prices may even edge lower in the coming months if the EU Commission decides to pause the intervention scheme. That doesn’t bode well for butter supply. Not only in terms of prices, but also for volumes, which may become a bottleneck going forward. Some relief is expected if New Zealand’s 2017-18 dairy season is successful (international prices have already begun to stabilise) and/or the EU is able to dispose of its SMP stocks in a way which does not disrupt the market.

Anything but a ‘piece of cake’

Not all cookies are made with butter, so the impact of higher butter prices is not felt equally across the industry. But, in those cases where butter is used, it tends to represent a significant part of the ingredients bill. For products such as butter cakes, egg waffles or Dutch stroopwafels, butter may quickly account for up to 15-20 percent of the overall cost price. Based on 2016 price levels that is! 

Over the past six months, the butter price soared to levels more than twice that of 2016. There is nowhere to hide for suppliers of ‘buttery’ cookies. Substituting butter with margarine or palm oil is not something that can easily be done, especially for products where consistent taste profiles are important. With typical purchase contracts lasting three to six months, the price hike will likely have full force impact in the coming half year. 

The average operating margin for the European biscuits industry is roughly six percent, so ‘sitting it out’ is not a very appealing option either. That leaves little else than convincing food retail clients to accept higher selling prices. And even if retailers do so, suppliers cannot be sure of their business. Will the consumer appetite for butter products be large enough to overcome the growing price difference with non-butter alternatives on the cookie shelf? 

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Where to go from here

  • Sebastiaan Schreijen

    Senior Analyst - Consumer Foods
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  • Kevin Bellamy

    Global Strategist - Dairy
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  • Cyrille Filott

    Global Strategist - Consumer Foods
    Read more