Joe Collins, MD of Ornua trading and ingredients, warns that the spike in spot butter prices in recent months carries demand and brand risks within the supply chain and may not translate into long-term higher milk prices at the farm gate due to low skim milk powder (SMP) returns prices.

He says SMP prices have remained depressed in the last 12 months with prices just 15% above the intervention floor. This product price mismatch has discouraged processors from making additional butter as the cent-per-litre returns are affected, with strong spot butter returns being negated by lower SMP returns. Milk prices tend to reflect the wider product portfolio and forward contract mix.

Collins adds that while the retail price of butter has increased, it only partially reflects the spot price increases. He says butter brand strategies are being affected and there could be long-term brand damage with the potential for reduced demand as consumers trade down to own-label, lower-quality brands or margarine.

Food ingredient customers including bakeries see butter costing 60%-80% more than budgeted, with some now looking to dairy substitutes.

The market would welcome a rebalancing of fat and SMP protein values as this would be sustainable for all parties.