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CC: high butter prices is the result of interaction between many factors

(29.08.2017.)

Considering the price increase of dairy products, in particular butter, during the last year, the Competition Council of Latvia (the CC) continues to follow the events on the dairy market. The CC has concluded that the amount of the butter price is determined by several reasons – the global trends, product cost increase during the processing due to limited availability of raw materials as well as mark-up of retailers.

When analysing the data of August of the current year in retail stores in Latvia, the price of 82% butter ranges between EUR 7.95 to 13.61 per kilogramme. The CC, when becoming acquainted with the data published by the European Commission on the global trends in the United States of America, Oceanian countries (Australia, New Zealand etc.) and in the European Union (UN), has established that in July, in comparison with the July 2016, the increase of butter price by 94% is observed across the whole EU, in the Oceanian countries even by 118 % and in USA – 14%.

Butter is an agriculture product with comparatively long shelf-life, therefore it is also a successful export product. The price of goods, which are being exported, is directly affected by the price trends of the EU and the global market as well as expenses of a processor and retailer’s mark-up.

The price increase on the global market has been affected by both, bad weather conditions as well as the common European position on abolition of quotas:

  • A significant part of farmers had been forced to cease production of milk and to reorientate to the live-stock breeding business or to cease the commercial activity at all before the European market liberalization in 2015, which substantiates the leftovers of the produced milk and losses in relation to that. At the time, when distribution of the milk production quota system was abolished in Europe, the geographical boundaries of the milk procurement were expanded, but the number of farmers, who were able to ensure the demand for milk, reduced;
  • In such power states of the milk production as Australia and New Zealand the volume of produced raw milk has significantly decreased due to non-beneficial conditions, and that significantly limits the export volumes of dairy products, which results in the increased price for dairy products.

Taking into account the changes, which have taken place in 2015, a part of dairy farms in Latvia selected cow breeds, producing more milk, but with the reduced fat content. The information obtained by the CC from dairy cooperatives confirmed that the more milk is milked from a cow, the smaller is the fat content in milk, but the bigger is the skimmed milk content.

Also the European Commission has indicated that in 2017 the fat content for cow milk is below the previous years. The Latvian processors explain that few years ago the milk, delivered by farmers, was with the fat content of 4.4%, but now it mainly contains 3.9% of fat at the maximum, which is a significant decrease for the process of butter production.

It should be noted that also the eating habits of people are changing. Namely, several years ago people consumed huge amount of  vegetable shortening mixtures and palm oil, but by the time, when observing the non-beneficial impact thereof to health, consumers started to consume butter more and more, therefore the demand for it has increased.

Sweet cream is processed accordingly, depending on the technological process, in order to obtain butter from it. Therefore processors quite often need to purchase sweet cream in addition from other processors, because they cannot obtain the necessary quantity of sweet cream from the same milk volume with less fat content. According to the information provided by processors, the price of sweet cream in Latvia has doubled in July 2017 in comparison with July 2016. Latvian producers explain to the CC that such price increase of sweet cream is the result of the demand for milk fat, including also butter as the product of milk fat, on the global market.

With regards to expenses of production of butter several processors informed the CC that product cost of butter production has significantly increased. According to the data of the European Commission and the Ministry of Agriculture of Latvia about the butter prices of processors, the average butter prices of Latvian producers was EUR 544/100 kg in August 2017. During the same period the prices of the EU industrial butter processors was EUR 589/100 kg. In its turn, in August 2016 the processor’s prices in Latvia was EUR 317/100 kg and on average in the EU – EUR 333/100 kg. Thus the butter prices have increased both for Latvian as well as the EU butter processors since 2016.

All of the above mentioned reasons indicate that a shortfall of milk fat is to be observed not only in Latvia, but also in the EU, which is confirmed also by the situation in retail stores, where sometimes a butter with fat content 82.5% is not available on shelves. Information, which is received from the milk processors of Latvia, shows that recently the demand has increased not only for butter, but also for sweet cream. It is economically more beneficial for the processor to produce sweet cream than butter, therefore a part of processors have ceased to produce butter. Latvian processors also confirm that it is economically more beneficial to produce yoghurt and cheese from milk with less fat content than butter or sweet cream.

When comparing the retail price of butter in Latvia, Lithuania and Estonia, it is currently to be observed that the average regular price of butter on the Latvian market is by 20 - 30% higher than in the neighbouring countries, but considering the promotional prices for butter and the lowest prices for private label butter in retail stores, the difference in price is actually decreasing. On 25 July 2017 the European Commission has indicated that the butter price increase has been reflected in retail also in other Member States, such as Belgium, France and Spain.

Information available on the website of the Agriculture Data Centre of Latvia indicates that the average purchase price of raw milk in Latvia has only slightly varied in 2017, namely remaining between EUR 0.288 and 0.31/l. At the same time it is to be established that the supply price of processors have increased approximately by 40% during the time period from January to August 2017. Meanwhile the CC establishes that the retailer’s mark-up for butter reaches even 70%, excluding value added tax (21%). Therefore, the CC concludes that along the whole supply chain – from raw milk producer up to the shelf in the store – also the retail surcharge is a significant part of the price increase for butter.

Upon the increase of globalisation, the Latvian raw milk producers and processors even more feel the impact of global trends and are forced to take them into consideration. Global crisis, changes in habits and traditions, global increase of demand and more or less cyclic instabilities in the dairy industry make the prices of milk and milk products unstable, creating both additional opportunities as well as risks for milk producers and processors. Price increase of sweet cream and butter in July and August, as well as price fluctuations of raw milk and dairy products observed during the recent year show that the Latvian milk market is strongly influenced by all of the above mentioned factors and, in order to overcome periodic crisis, milk producers and processors have to be ready to look for solutions outside of the traditional markets.