From the Experts

The slippery slope of EU dairy policy

By Jo Bills

IT’S THAT time of the year when we traditionally look back on the year that was.

It’s also a time for looking forward to the year ahead — perhaps with trepidation, but I reckon if you’re a farmer there is always hope.

Looking back on the year — from a global market perspective — the big story has been butter.

I have been around the industry long enough — I started very young — to remember when milkfat was a problem the industry had.

Back in the days when fat was bad, it was all about protein. Payment systems have reflected that for a long time — traditionally around 65 per cent of the price farmers received for a litre of milk was for protein. Fat was component non-grata.

Fast forward to 2017 and sugar is now the bad guy — fat is not so bad as it turns out. The good news for dairy is natural, tasty fat is even better.

While the structural uptick in demand has seemed surprising it’s a shift that has taken years, and reflects the convergence of a number of trends — the MasterChef movement with renewed interest in watching cooking ….if not actually doing it — and using more authentic ingredients.

Alternative spreads and oils have fallen from favour because of their highly processed nature, and butter has emerged as an unlikely hero product for the dairy industry — what great news!

While demand appears to have undergone a structural change, it isn’t enough to explain the record-breaking prices for butter that have prevailed for most of this year [Graph 1].

It has understandably got some farmers asking to be shown the money. But the fact is, there has been very little product to trade at these crazy values. How can that be?

In France #BeurreGate is actually a thing! The absence of butter from supermarket shelves and the threat to croissant consumption is no laughing matter, with stories from The Economist, the UK’s Daily Mail, even the New York Times, as well as the local press grappling with the issue.

We recently wrote a blog on our website canvassing the various explanations offered up in the media about the “butter crisis”.

Most blamed the Chinese demanding more dairy products. Other explanations for this global butter shortage included climate change, tough pasture conditions and lower grade feed in Australia, and EU farmers scaling back production as a result of market liberalisation and lower prices.

But do these explanations really add up?

Haven’t we all been suffering from a global milk over-supply for a few years — surely there’s enough milk to go around and satisfy this increased demand?

In fact, Chinese imports have actually backed off in milk equivalent terms since 2014 [see Graph 2], and while infant formula sales grab a lot of attention, these products don’t use as much dairy as many believe.

So, what would explain this apparent disconnect between demand for a product and its supply?

Just as #BeurreGate has hit Europe hardest, as one of the world’s largest producers and exporters of butter, the answer appears to lie there.

Because into this golden age, this butter market renaissance, lumbered the EU Commission.

Through its SMP intervention program, which it extended over the past 18 months to support EU farmgate prices, the Commission has amassed an impressive stockpile of almost 400 000t, which it has been unable to liquidate.

The size of the stockpile and the uncertainty over future policy direction has sunk SMP values so low that for much of the past 12 months, despite record butter prices — cheese has been a more profitable destination for European milk.

Processors have however carefully managed to avoid over-producing cheese. Low SMP prices have also deterred other exporters such as New Zealand from directing milk toward butter.

This has made it challenging to address shortages, and driven butter values to dizzy heights — although spot prices appear to have hit the ceiling in recent times. Lack of supply and high costs have possibly led to some substitution from end users — taking the gloss off the butter demand revival.

That situation is unlikely to change if a recent proposal from the Commission is passed by EU members.

Vexed by the mountain of SMP they are sitting on, and the prospect of even more EU milk growth in 2018, the Commission is proposing to change its policy, so that when intervention opens on 1 March there will no longer be a set buying-in price — but a case-by-case decision … from a committee.

This is to avoid further intervention purchases in 2018, which would undoubtedly occur if dairy manufacturers are to address the butter shortage, safe in the knowledge that there would at least be floor under SMP.

Under this proposal, uncertainty is cranked up even further. Until the powder mountain is consumed, the butterfat-protein quandary will remain.

So while it’s beginning to look a lot like Christmas, many consumers in Europe might be short on the shortbread, it might be hard luck on the hard sauce for the pudding … and time to banish the brioche!

• Jo Bills is a director of www.freshagenda.com.au