Butter

Global Butter Market Outlook:

• The global milk production volume in 2023 is forecasted to increase marginally compared to 2022. The regional differences and skewed trade dynamics are expected to govern the global price volatility in the near term

• Oceania is a key market, as it produces only 5 percent of the global milk, but contributes to more than 40 percent of the milk derivatives export market

• The FAO Dairy index in January declined by 1.4 percent from December, due to lower global butter and milk powder prices. However, cheese prices held steady due to healthy demand from the retail and food service sectors.

Butter Demand Market Outlook

• Overall global demand is projected to witness an increase of 2 percent Y-o-Y in 2023, supported by a recovery in consumption from the major downstream sectors across Europe and the US, with global consumption volumes forecast to increase by 219,000 MT Y-o-Y.

Dairy Derivatives: Value Chain

• The market complexity is high, due to standardization and multiple (38) co-products in the value in tier 2 and 3, with majority of the products finding applications in the food & beverage industry. The dairy derivatives (tier 3) products namely the cheese and butter along with whey yield higher profits (15-30 percent) compared to tier 2 products (less than 15 percent).

Butter: Supply–Demand Analysis

• In 2022, the butter market was oversupplied by 3.3 percent, primarily due to higher production prospects in China and Belarus by 10 and 9 percent, respectively, Y-o-Y offsetting lowered prospects in Argentina, Australia, Ukraine by 14, 6, and 3 percent, respectively.

Market Outlook

• The capita consumption of butter in developing countries is expected to increase by 1.0 percent/annum on average

• Emerging markets, namely Russia and Canada, have improved production by 9 and 31 percent, respectively, between 2016 and 2022, thereby contributing to the global market supply and have projected an increased level of self-sufficiency to meet rising domestic consumption levels

Porter’s Five Forces Analysis: Butter

Supplier Power

• The market volatility opens opportunities for dairy farmers in India, Russia, Ukraine, China, and Brazil to increase efficiency of production

• Major suppliers are integrated to dairy farm level and companies like Fonterra and Amul, are secured through the co-operative models

• Significant threat exists if major suppliers/co-operatives cannot make competitive milk pay-outs to shareholder suppliers

• Equal opportunities and threats maintain supplier power at a medium

Barriers to New Entrants

• Economies of scale is a significant barrier

• Global entrants are most likely to be from low-cost supplier nations, with a strategy of increasing export share or highly targeted high- value niche producers

• Countries, like New Zealand, with deregulated market structure and relatively low cost might attract entrants (e.g., Chinese manufacturers) as a base for export-oriented supply and processing

Threat of Substitutes

• The dairy derivatives are unique natural products, however, substitutes do exist in the form of vegetable oils

• The shift in consumers from milk fat product to vegetable oils in the emerging and few developed countries.

•  Substitution is possible, but with consumer preference for cheesy snacks in the U.S. & EU; butter considered a tradition in countries like India; and growing inputs of whey protein in infant formulae, the threat is low - medium

Intensity of Rivalry

• Continued consolidation of industry could see competing dairy resources being merged into larger, more efficient competitors

• Competitors may respond to trade liberalization through increasing global growth strategies

• With increasing consolidation, rivalry among large competitors is expected to increase significantly, after they achieve saturation in their own markets

Buyer Power

• Continued consolidation of food manufacturing and retailers has the effect of reducing the overall number of buyers and increasing their negotiation power

• Most buyers are pursuing strategies to secure supply channels

• Since the market is oversupplied, the buyers engaging with integrated suppliers have high negotiation power

• Supplier switching cost is low, as the products are often traded in standardized forms E.g., Cheese 40# Block