This year’s increase in butter prices is explained by the global imbalance between supply and demand for raw milk, fats and proteins. Recently, there was enough protein, but not enough fat, explains analyst Maksym Fasteev from “Infagro”. Major exporters cut raw milk supplies due to low fat content, while strong importers and the Middle East increased consumption of fatty products, especially butter, pushing European prices to record levels.
For in words CEO of the company “Corn field” Andriy Tabalovand, “due to the low margin, Ukrainian dairy farmers focus more on exports. This can lead to a deficit in the domestic market.” According to him, additional pressure on local producers is created by imported dairy products, especially cheese.
Ukrainian producers are looking for foreign markets, because Europe willingly buys their oil, and prices there are rising. Due to the high demand for exports, some manufacturers are focusing on the European market, which also affects prices in Ukraine.
How the cost and availability of raw materials affect the market conditions of the dairy industry
The main component of the cost of butter and cheese is the raw material. Production of milk in Ukraine decreased by 5% for 2023, reaching 7.4 million tons, which caused an increase in the shortage of raw materials for the dairy industry. According to the Union of Dairy Enterprises of Ukraine, in the first five months of the year, prices for raw materials increased by 40% due to shortages, which directly affected the cost of final products.
Drought, high energy and transportation costs were the main reasons for this decline. AVM analyst Georgy Kukhaleishvili notes: “Also, the increase in the price of milk continues due to the fact that, in conditions of shortage, milk processing enterprises are forced to purchase more raw materials over long distances and spend additional money on logistics”.
Volodymyr Petryna, general director of the dairy company “Halychyna”, explains, that this shortage is caused by a long-term decline in domestic dairy farming. Small farms are gradually disappearing, while large ones have not yet gained momentum. “The segment of small-scale production did not develop properly because it did not provide quality products. At the same time, large commodity farms are not growing fast enough. Today, we process about 3.5 million tons of milk, while in Poland – more than 14 million tons. This is not enough to satisfy the domestic market and export needs– adds Petryna.
Dry weather conditions have reduced the quality and quantity of forage for livestock, which has reduced the productivity of dairy farming. Rising fuel and electricity prices have increased the cost of milk production and transportation, while damaged and aging infrastructure has hampered logistics and production efficiency.
Producers are forced to raise prices to compensate for increased costs, which reduces the availability of dairy products to consumers and may lead to further reductions in domestic consumption.
Purchase prices are rising, and retail chains are in no hurry to pay for deliveries. A number of problems logically arise: the prices of raw materials are rising, the shortage of milk forces producers to transport raw materials over long distances, which increases the cost of oil production; power outages and heat have reduced the productivity of dairy farms. All this, together with the background of low profitability, forces our producers to look for export opportunities.
The situation of the world milk fat market
The global milk fat market shows considerable volatility. In the EU, oil prices have reached historic highs due to the pandemic, war, climate change and aging farmers. In accordance with data According to the Food and Agriculture Organization of the United Nations (FAO), over the past year the average world price for milk fat has increased by 8%. This creates favorable conditions for exporters, in particular Ukrainian companies, as high prices increase the profitability of their products on international markets.
These price dynamics are driven by several key factors. First, the war in Ukraine created serious logistical and production obstacles, limiting the supply of dairy products to the market. Second, abnormal climate changes affect the yield of forage crops, which reduces the productivity of farms in many countries. Third, the effects of the covid pandemic are still felt in supply chains and additional logistics costs. Finally, structural challenges in farming, including labor shortages and rising production costs, are also putting pressure on prices.
How much does butter cost in Europe
In Poland, butter prices have increased by 40%, up to 8 zlotys per package, and may increase in price by another quarter before the holidays. In Germany, the price of butter has increased by 39.7% since the beginning of the year, and now a 250-gram package will cost the buyer 2.39 euros or more.
The increase in prices for milk of European origin is caused by a reduction in its production. This was due to the drought, which reduced the amount of forage available and reduced the productivity of the cows. And also due to the spread of the bluetongue epidemic, a viral disease affecting ruminants, which affected dairy herds in Europe, which forced farmers to reduce the number of livestock, reducing the volume of milk production.
Another reason for the increase in the price of oil is the increase in electricity and transportation costs in Europe, which affects all stages of production.
What does the increase in the import of dairy products mean for Ukrainian producers
The increase in the import of dairy products significantly affects the domestic market, creating serious challenges for local producers. This situation is caused by several factors.
First, the free trade agreement between Ukraine and the European Union contributes to a significant increase in imports. The reduction of tariffs on European goods makes them more affordable for Ukrainian consumers, thanks to which the number of imported dairy products from the EU is increasing. This is especially noticeable in the segment of cheeses, which are popular due to their variety and high quality.
European manufacturers have an advantage through government support in the form of subsidies that lower their production costs and allow them to offer competitive prices. In the EU, the dairy sector receives 2/5 of all agricultural subsidies, which makes their products cheaper. This makes them competitive even in the Ukrainian market, where local manufacturers often operate with very low margins and face high production costs.
The demand for imported dairy products among Ukrainian consumers is growing steadily, as shown by statistics: in the first months of 2023 alone, the volume of imported dairy products exceeded 20,000 tons. This indicates a significant increase in competition in the domestic market, due to which domestic producers are forced to reduce their profits in order to remain competitive.
In addition, the high costs of energy, transport and raw materials complicate the situation of Ukrainian dairy farmers and make them uncompetitive with European producers, especially in conditions of limited support from the Ukrainian government. Although some subsidies exist, they are much smaller compared to the support European producers receive. This makes it impossible to invest domestically in modernization in order to increase competitiveness.
Such a situation can lead to serious consequences for local manufacturers, who, working with low margins, risk reducing production volumes or even curtailing it.
Challenges and opportunities for Ukrainian milk fat producers
On the one hand, infrastructural and economic problems due to the war limit the production capabilities of domestic dairy farmers. On the other hand, the high profitability of exports against the background of rising world prices can stimulate the development of the industry and increase exports, which will have a positive effect on the Ukrainian economy.
At the same time, the domestic market is under pressure from a shortage of raw materials and competition with imports. And if the state does not implement measures to support the dairy sector in the near future, Ukraine risks facing a further reduction in production volumes and import dependence.
In order to stabilize the situation, it is necessary to strengthen support for local producers, in particular through investments in the development of animal husbandry, reduction of energy costs and optimization of logistics. This will allow not only to preserve the domestic market, but also to ensure the long-term competitiveness of Ukrainian dairy products.
Tetyana Viktorova
