Spring flush unlikely to pressure fat prices

Published 30 March 17

Fat markets have continued to perform well in recent months despite increasing milk production. As we move towards the northern hemisphere peak, the question is whether fat prices can continue to hold strong.

At a domestic level, wholesale prices for butter and cream rose in March by 6% and 10% respectively. With prices for cheese starting to show weakness and SMP prices dropping to near intervention levels, the strong fats market is helping to keep pressure off farmgate prices.

With little hope of any short-term improvement in SMP prices, the availability of butterfat will play a key part in determining the direction of processor returns and, in turn, farmgate prices.

Typically, as milk production levels increase in the spring, the fat percentage in the milk falls away. This has the effect of dampening the impact of rising milk volumes on the overall availability of butterfat*. The peak production of butterfat tends to occur earlier than the peak in overall milk volumes and its seasonal distribution is generally more subdued, with a lower peak and less of a drop-off through the winter months. 

03 Spring Flush Unlikely To Pressure Fat Prices Graph

*based on tonnes of butterfat obtained from monthly milk deliveries 

Since butterfat supplies tend not to rise as sharply as milk deliveries, this should limit any downward pressure on returns, at least from fat markets.

For March, the monthly increase in average daily butterfat production has historically been between 2%-5%, with a similar monthly increase in April (2%-4%). This year, despite the higher fat production, markets moved upwards in March as demand remained strong.

This suggests that, in the current market, the seasonal rise in milk production alone should not be enough to force butterfat prices down. As with all commodity markets however, prices will be determined by the overall balance of supply and demand across a number of key regions, as well as any exchange rate movements.