Is the worst over?

Published 16 June 16

There has been renewed hope in the industry over the last few weeks, with a number of industry commentators announcing the bottom of the trough has been reached. Here, AHDB looks at the key facts driving the optimism, as well as what happens next.

The fat market has been the main driver behind the recent increases in commodity prices. The EU Commission publishes average EU prices each week and these have shown butter up 11% in three weeks. While there have been a number of short-term price increases recorded over the last 18 months that didn’t result in a sustained recovery in prices, this latest rise is the strongest recorded for more than three years.

The upturn in butter prices appears to have been a bit of a surprise for some. A number of traders are explaining it as buyers with lower-than-expected stocks needing to fill stores before the summer. Certainly the higher butterfat levels in milk this year suggest there is plenty of fat around, but if buyers have left themselves short, prices will go up. In general, however, the more positive outlook shouldn’t come as a great surprise, with milk production running significantly down on expectations in the UK as well as other EU countries. Looking ahead, domestic production is expected to be lower this year than last, and the EU commission is now forecasting a contraction in EU-28 production over the remainder of the year. This suggests the huge year-on-year increases in milk production are now behind us.

EU Commission commodity prices Jun16 

Source: EU Commission/Agra-Europe

SMP prices have not shown the same strong recovery. They are trending upwards, but not as rapidly as butter. The main reason is likely to be the high level of SMP intervention stocks. Careful management of those stocks is required by the EU Commission to avoid drowning out any recovery.

What happens next?

Converting the butter and SMP prices into a milk price equivalent, would see AMPE jump from around 16.8ppl to 18.5ppl. This increase should start to filter through into farm prices over the next few weeks. B prices should be the first to move upwards – assuming they work as they were intended to work. Manufacturing prices based on formulas should also start to rise as the market prices flow straight through to the farm price. How quickly other prices react will be down to negotiation and competitiveness, as well as an assessment by the milk buyer of whether they might actually find themselves short of milk later in the year.