The global dairy market is experiencing a period of transition as abundant milk supplies put downward pressure on fat prices while protein markets prepare for seasonal tightness.

Milk flush drives fat prices lower

Dairy fat prices are declining across all major producing regions, with both butter and anhydrous milk fat (AMF) feeling the pressure from increased supply. The correction is most visible in futures markets, which are already trading significantly lower, though physical markets have yet to fully adjust to these new levels.

European butter futures have led the decline as traders react to mounting supply fundamentals. The lag between futures and physical pricing suggests further corrections may be coming to spot markets in the weeks ahead.

Good milk production drives fat prices lower

The primary driver behind weakening fat prices is good milk production across Europe, the United States, and Oceania. A combination of higher cow numbers, favorable weather conditions, and attractive milk prices has created conditions for increased output.

European Union butter production increased 3.65% year-over-year in May, reflecting the impact of the spring milk flush. Similar production increases are being reported in other major dairy regions, providing ample raw material for fat product manufacturing.

This production strength contrasts sharply with softening demand in key sectors, with retail consumption declining in major European markets like Germany and France during May and June.

Q4 protein purchasing window opens

While fat markets face headwinds, the whey protein concentrate (WPC80) sector is entering its critical Q4 purchasing period. Buyers are beginning negotiations for fourth-quarter volumes as tight supply conditions and seasonal demand patterns create urgency.

Industry participants expect WPC80 markets to tighten further through the final quarter, following historical patterns where protein demand peaks while production remains relatively stable. Manufacturers are positioning Q4 prices slightly above current spot levels, though avoiding dramatic increases that could dampen buyer interest.

The protein market dynamics highlight the divergent paths between dairy sectors, with whey derivatives maintaining strength while fat products face pressure.

Currency volatility adds complexity

The EUR/USD exchange rate has returned to high volatility, currently favoring dollar-denominated transactions over euro-based deals. This currency movement is creating opportunities for buyers seeking euro-denominated products, as European exporters may need to offer more competitive pricing to maintain market share.

The unfavorable exchange rate environment for European exporters adds another layer of pressure on regional dairy markets already dealing with increased supply.

ONIL tender creates demand opportunity

The announcement of an ONIL tender for November 2025 to February 2026 deliveries provides a potential demand boost for skim milk powder (SMP), whole milk powder (WMP), and AMF markets. Traders and producers have until this week to submit offers for the tender.

These institutional purchases can provide temporary market support, particularly for powder markets that have struggled with weak global demand. However, the long-term impact will depend on the tender’s size and subsequent market absorption.

Market outlook

The current market environment reflects a classic supply-demand imbalance in fat products, while protein markets prepare for seasonal tightness. The divergence between futures and physical pricing in butter markets suggests the correction process is still ongoing.

Procurement managers should monitor the pace at which physical markets adjust to futures pricing levels, while also considering the seasonal dynamics affecting protein markets. Currency volatility adds another variable to purchasing decisions, particularly for cross-border transactions.

The contrast between abundant fat supplies and tight protein availability underscores the importance of commodity-specific strategies rather than broad dairy market approaches.

This article is part of our full market analyses on butter and whey: https://app.vespertool.com/market-analysis?commodity=dairy