As demand for butter and milk fats accelerates, the dairy products market may shake off a few challenging years, including lower demand and production, said Lucas Fuess, senior dairy market analyst at Rabobank, to FoodNavigator-USA.

Evasive margins

"We're coming out of a 2023 that saw fairly low milk prices. It was quite a challenging year for farmers. Margins and profitability have been quite evasive overall. Feed costs have still been relatively high, lower milk prices created quite a tough situation on the farm.

And now, we find ourselves in a situation where milk production has subsequently decreased not only in the US but also in most key global regions, including the European Union, places like New Zealand, even in South America."

Decreasing production responds to decreasing milk demand

Rabobank highlighted the global dairy products market condition in its recent quarterly dairy report, for which Fuess was the lead author with contributions from his colleagues.

The dairy products market saw lower milk production and demand, so "prices have been quite sideways limited over the last several months," Fuess said. Dairy product market challenges are likely to continue into the first quarter of 2024 and the second quarter, he added.

In the US, the decline in milk supply comes from both the actual size of the milk herd and the decrease in milk per cow. The size of the herd decreased by 76,000 cows in the last year as farmers sought to replace low-producing cows, and milk per cow decreased by 0.3% in January 2024, while yields increased by an average of 1% in 2023, Rabobank reported.

US dairy exports declined by 5% in December 2023, and exports fell by 7% for the whole year, driven by lower demand in Asian countries. However, one of the largest buyers of US dairy products, Mexico, "had a very strong year in '23, mainly importing cheese and skim milk powder," Fuess said.

In 2024, Rabobank expects "production to rebound," increasing by 0.5%, as demand also recovers, he said. Positive macroeconomic factors, such as lower inflation, could boost exports to China and other countries, he added.

"As demand slowly increases, we expect an overall positive impact on prices that will evolve this year as well. I want to warn or preface that we don't expect a return of the truly high prices we saw in 2022. We're not too optimistic about these trends, but overall, looking towards 2024, the prices of most dairy products and milk, in general, the attitude of dairy products looks a little better in '24 than what we saw in 2023."

He added: "All these big macro trends we've faced in the last 12 to 18 months look a little better in 2024, which shapes our view that maybe some buyers from these countries will return to the market and demand a bit higher."

Butter growth

While consumer demand for fluid milk has been declining for years, many consumers are now eating more dairy from cheeses, yogurts, and butters, Fuess noted.

"When we think about demand for fluid milk - or demand for drinking milk - it has been declining for many years now. But when we look at the category as a whole, we eat a lot more of our products, instead of drinking dairy products.

And domestically, total demand for dairy products continues to grow year after year. So things like cheese to add yogurt demand, all these things more than offset the decline in demand for fluid milk overall."

The dairy products market is expected to see continued strong demand for butter, which averaged US prices at $2.6294 per pound in January 2024, Rabobank said. Consumer trends regarding healthy fats also contribute to strong demand for butter, Fuess emphasized.

"Demand for butter, both domestically and globally, continues to be almost off the charts. We set a record butter price in the US in '22. We exceeded that record in 2023, and butter prices in the first quarter [of 2024] are extremely firm, so it's an aberrant thing for some of the price behavior we see in anything else.

Consumers continue to buy it from grocery stores, [and]... there remain trends where people switch from vegetable oil or other products to just butter, and we simply cannot make enough."

Despite lower milk production, cows "are producing record levels of milk fat," but cannot keep up with consumers' demand for butter, he said.

He added: "Butter [is] in that category with nuts, pistachios, almonds, avocados [and] all those simple ingredients or unique products and continue to ride the wave of this changed perception overall about healthy fats." (Photo: Dreamstime)