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Analysis dairy business

Why the ECB can cling to butter price

June 21, 2023 - Wouter Baan

If even the prestigious British business newspaper Financial Times writes about the butter market, then something special is going on. And that is also the case. In times of sky-high food inflation in the Western world, butter prices are the exception to the rule. This offers prospects for the European Central Bank (ECB), which, with their aggressive interest rate policy, is trying to push inflation towards the target standard of 2% as quickly as possible.

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High food inflation has dominated the news for months. At the beginning of this week, De Nederlandsche Bank (DNB) calculated that food inflation in our country will probably exceed 2023% throughout 10. The picture is not much different in many other European member states. This situation has been causing headaches for ECB economists - led by President Christine Lagarde - for months. After all, their goal is to reduce overall inflation in the eurozone as quickly as possible. There is a lot of work to be done to achieve this goal, as evidenced by the rapidly rising interest rates, which were increased by another 0,25 percentage points to 3,5% last week. Moreover, the top of the yield curve has probably not yet been reached, as has already been hinted.

Despite the rapidly rising interest rates, the ECB is still achieving little results. Inflation is indeed falling, but this is not happening very quickly. The target standard of 2% is still a long way off. In the Netherlands, inflation even rose slightly again in May. Food inflation in particular – something that all Europeans feel in their wallets every day – is sky-high. In many countries it is still more than 10%. This causes quite a bit of frustration. Food producers are accused of grabflation. The French government has even started to actively intervene in food price policy by forcing reductions. It is unacceptable for the government that consumers have to dig deeper into their pockets, while raw material prices have been falling for months.

Butter prices choose their own course
While many food prices remain at the same level or sometimes even increase further, butter prices choose their own course. Consumer prices of butter have fallen rapidly in recent months. Especially in Germany. There, price fighters such as Edeka, Aldi and Kaufland are doing massive stunts with butter. Consumer packaging is sometimes offered for sale at discounts of up to 50%. Prices have also fallen considerably in the Netherlands. Campina butter, for example, cost more than €3,50 per 250 grams this winter, but is now priced more than €1 lower, according to data from Supermarktscanner.

The Financial Times has also noticed the rapidly falling butter prices on German store shelves. The newspaper writes that falling butter prices offer the prospect of lower inflation in the euro zone. According to the newspaper, this means there is light on the horizon for the ECB. However, the German market does differ somewhat from the picture in other Member States. In France, for example, consumer prices for butter are still rising. However, there has been a significant decline across Europe, fueled by the movement in Germany. The Financial Timers also quotes Thomas Carstensen, head of trading at dairy cooperative Arla, who says butter could be an early indicator of lower food inflation.

Monthly negotiations
There is a reason why German prices are falling rapidly. Food prices are often agreed between producers and retailers for six months or a year, but this is different on the German butter market. There, producers and supermarkets negotiate the price every month. This is because the butter market has had a capricious character from the past. In this case, consumers can therefore quickly benefit from the lower butter prices. What probably also plays a role in the background is that butter is a 'straightforward product' with only milk fat as an ingredient. This means that consumer prices can almost directly follow the raw materials market.

As a result of the rapidly increasing milk supply in Northwestern Europe, butter stocks in Europe have risen sharply in recent months. This has significantly reduced the price of butter on the dairy market. Prices have been stable since mid-March, between €4.500 and €4.700 per tonne. Demand is weak and the delivery volumes have a relatively high age. It is possible that the competitive offers on the shelves will create additional demand, although the ECB probably does not hope that this will subsequently lead to price increases on the shelves.  

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