After years of building up herds that produce low-fat milk, the world’s dairy industry is now struggling to meet a surge in demand for cream and butter. Butter prices have more than doubled over the past year, but heavy stocks of (low-fat) milk powder are pressuring milk prices. It could take years for the sector to adjust.
There is a saying in the commodity markets that demand is the backdrop against which changes in supply play out. Demand for most food products tends to increase by a small, but predictable, percentage each year, roughly in line with increases in population and income.
The supply of agricultural products, on the other hand, can vary significantly from one year to another. Weather is nearly always the most important factor driving supply. Price comes a close second—both the price of the commodity itself (with a time lag), and the price of alternative, competing crops. Crop diseases and pest infections can from time to time also be important drivers.
However, as I wrote last week, the demand for a particular foodstuff can sometimes change dramatically in response to the publication of new scientific—or pseudo-scientific—research. When that happens, the demand shift is almost certainly amplified through both traditional and social media. The traditional media in particular like new scientific studies that go against conventional wisdom. The most recent—and most dramatic—example is the way consumers no longer believe that both animal and vegetable fat makes you fat. Conventional wisdom now blames fructose, whether in sugar or in fruit juices, for the obesity epidemic.
Nutritional scientists—and lobbyists—will doubtless argue until the cows come home whether it is fat or fructose that is making people fat. While they argue, dairy farmers struggle to sell their stocks of low-fat milk but are unable to meet the increased demand for the high-fat milk that is needed for butter and cream. Meanwhile, Florida’s orange growers struggle with a collapse in US demand for orange juice. Butter consumption in the United States is up 7-8 percent this year; orange juice consumption is down 5-7 percent over the same period—and down nearly 45 percent over the past twelve years.
Dairy farmers and orange growers have not only had to deal with dramatic shifts in demand; they have also had to cope with bad weather. It has reportedly been too wet in New Zealand and too dry in Europe to produce quality feed for dairy cows. (Both phenomena have been blamed on climate change.)
Meanwhile Hurricane Irma hit Florida’s orange groves hard this year, further lowering production that had already been decimated by greening disease. A solution has now been found for greening disease (by inserting a spinach gene into the tree), but it will take years for the new orange trees to mature. Growers are rightly worried that on current trends there won’t be enough demand to absorb supply once they do.
It will also take years for the dairy sector to beef up supply to meet the demand for high-fat milk. Most herds now consist of Holstein cows, a breed that produces large quantities of low-fat milk, perfect to meet the global growth in demand for milk powder for products such as infant formula in developing countries, particularly China. Farmers are now replacing those Holstein cows with Jersey cows that produce higher-fat milk, but it is a slow process. In the meantime, butter prices continue to rise.
But why are there actual shortages of butter in some areas of Europe—even ironically in Normandy, the heart of France’s dairy industry? Why isn’t price rationing demand? The answer is that supermarkets have been reluctant to pass on to their consumers the increase in butter prices. As a result they have refused to pay current prices, and European producers have found better buyers in export markets in China and, strangely enough, in New Zealand.
Consumer trends can have a real impact on demand for different commodities. It takes time for supply to adjust and by the time it does, there is always a danger that the science will have moved on.