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The forecasts of
the butter market in the
short-term are necessary
to take the decision to
enter or not in that
market. The indicators
used to evaluate the
feasibility are the three
main indicators for one
country: the GDP
forecasts, the inflation
forecasts and the
unemployment rate. In
addition to that, it is
important to take into account the evolution of the butter business and the consumer behaviour.
France forecasts
The situation in France will stagnate in the short-term. The GDP growth rate forecast is
very low. The Eurozone on the other hand currently has a GDP growth rate of 0,60%. However,
the situation can be changed at the start of the new year. Indeed, the minister of economics
Bruno Le Maire and his colleague Gérald Darmanin have launched their new project called
“Projet de loi de finances” (PFL). The objective of this project is to reach an economic growth
of 1,7%. In that case will the GDP growth rate be positively impacted.
The inflation rate is very low. At the moment, the French inflation is of 1,2%, which is below
of the 2% required by the ECB. In relation with the French CPI, the first quarter in 2018 will
show unchanged results. Thus, the inflation should remain stable in the future, which is not a
good thing for the
growth. French people
prefer to invest their
money in protected
financial products.
The last indicator is the
unemployment rate,
which is very correlated
with the inflation rate and
the GDP growth rate. We
can invoke the Phillips
curve to highlight the
18
French situation. There is an unemployment rate of 9.70% in France and the inflation rate is
low and unchanged with respect to the recent years. According to the Philips curve, the
unemployment rate should not change during the coming years. However, the growth
expectations in France will trigger a forecasted 9.6% unemployment rate in 2018 and 9.3% in
2019, which seems like a relief, especially for the French lower social classes, who already
struggle from industries outsourcing their production. In addition to that, the French
government has decided to delete the “Contrats aidés” to increase the spending, in order to
improve the qualification of each worker. This strategy does therefore not change the
unemployment rate in the short term.
Consumer behavior
For several years, the consumers have lost their confidence in the politics and in the
economy. The trigger was the subprime crisis, when the governments were unable to resolve
and stop the situation. The incapacity of the governments to strive against the unemployment
and to improve the economic growth does not reassure the consumers to plan their future. The
consumer confidence is a short-term indicator, which is measured with the forecasts of
consequent investments. The economy, the security, the employment and the health are the
main factors of the consumer confidence.
On the graph
hereby, the consumer
confidence between
the OCDE and France
are very similar until
April 2017. In April
2017, the consumer
confidence in France
has increased,
probably thanks to the
presidential elections
and the election of the
new president
Emmanuel Macron. Thus, some French people have done investments in different projects or
they believed in change, as they believed that the situation would improve. Between August
and September 2017, the situation has changed, French people have lost their confidence. At
that moment, Emmanuel Macron launched different labour and social reforms, like for example
the decrease of the “Aide Personnalisée au Logement” (APL). Because of that decision, many
people had difficulties to find accommodations.
France is always a target for the terrorists, thus some people are worried about the risk. 1.5
million tourists have been lost by Paris due to the risk of terrorism. The result of this risk is the
19
loss of earnings. Indeed in 2016 Paris has lost 1.6 billion euros. This is a curb to expand the
economic growth.
The French healthcare system is well-known, because it is very good and often free
thanks to the Social Security. Unfortunately, the Social Security has a lot of debt and the
government wants to decrease it. Thus, a few surgical operations or some drugs will be not
refunded in the future.
Butter business
In the United States, the milk market is very powerful. In 2016, the U.S. have produced
approximately 95 million tons of milk. The milk market in the U.S. is very protected by the
customs and the health security. Indeed, this year Americans and Canadians have renegotiated
their agreement under the NAFTA. Trump’s and Trudeau’s administrations did not agree on the
quantity, the price and the conditions to enter in the U.S. The American consumption of milk is
lower than its production. The U.S. have a surplus of milk because 10% of its production is
exported, especially in Asia. Nevertheless, the American consumption is very strong thanks to
the milk fat. For example, in 2015 McDonald’s has decided to use butter in its production.
Thus, the annual demand has increased of 20,000 tons. The milk fat is used to produce butter.
During the last years, the milk fat was abandoned by the customers, because it was considered
as bad for the health. As we said the U.S. market has increased the demand, and so has the
Asian market. The milk fat or the butter are dependent from the milk market.
The Chicago Mercantile Exchange (CME) offers one of the largest exchange of futures
on its market and is very powerful for the commodities market in the world. The commodities
are very volatile, because the commodities market is a short-term market. The CME trades
mainly futures securities. A futures contract is a financial security where the buyer and the
seller reach an agreement and set the end date and the price that will be obtained on that end
date. The futures securities have an underlying asset. The aim of the futures is to enhance the
price of one asset in the future.
The graph shows the fluctuation
of the price concerning the
futures Milk III in the CME.
Since August 2017, the futures
prices have decreased before it
increased until November 2017.
That is why some investors had
planned an increase of the
European production in
comparison with the previous
years. The second decrease is
that the European countries had a
price butter below the U.S. price
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of butter, therefore they were able to export at cheaper prices, for example to China.
The second graph shows the
price of the Futures Milk III in
2018. Investors are very
concerned about the situation
of the milk in the short-term.
The investors can be the
company of the bulge bracket,
broker-dealer or producers of
milk. Currently, from a
financial point of view, the
situation of the milk is not very good because the market makers have several questions about
the market environment, especially with the situation in Europe. However, they believe in a
slight improvement in April 2018 with Easter season.
Concerning the butter price in the
U.S., investors have been very
confident about its increase for
several years. The American market
has a strong internal demand for
butter from the companies like
McDonald’s or the households. Even
though the milk price decreases in
the U.S., the producers know that
they could sell at a good price thanks
to the demand of butter.
In 2015 Euronext, the main exchange market in the Euro Zone, has launched a new
futures, which is underlying of the dry milk, the butter and the whey powder. Its name is
“Unsalted Lactic Butter Futures”. The Common Agricultural Policy has been dismantled, thus
producers and suppliers are subjected to the price on the market. Unfortunately, in France as we
said previously the producers cannot decide on their selling price. The French butter market is
in a bad situation. Some butter producers and distributors prefer to reduce their costs to be able
to cope financially if the situation continues. The Paysan Breton brand predicts a strong market
increase, which is the reason why it decided to invest in its production of butter with the
modernization of its equipment to increase its production by 10%.
The structure of the French butter market and the European one is old next to the U.S.
model. The French trade balance has a deficit (164 000 tons imported, 76 000 tons exported).
The situation is extraordinarily surprising because France is the first consumer of butter in the
world. France needs to use the butter as a figurehead to boost its market.
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Conclusion
As managers who want to enter in the butter industry, it is very important for us to
understand the background of the French economy and of the butter business, especially since
the recent shortage. Having a global overview is mandatory before making a decision. Here are
the main key points that are essential before making our decision.
The French economy is currently stable, and would probably increase in the next years.
The projections made on the French GDP are quite interesting. The amount of private
investment and the inflation rate seem to be the only drawbacks of the macro-economic
outlook. Despite those figures, France has to be considered as a stable economy and as a
potential interesting place for us to enter.
What about this industry in France? The butter industry is a domain where a lot of
uncertainty remains. Butter is a product that has a very large number of regular consumers on
the market. The demand remains high throughout the years. We could consider the demand as
stable.
There is more uncertainty for the offer from the suppliers. The global production and the
French production of butter have known a major drop during the year 2017. This decrease of
the production has caused a shortage of butter in France. In our report, we set five main reasons
for this drop:
• A decrease of the French butter production
• A growing worldwide demand
• A price war between big firms in the market
• The importance of cheese in the French consumer habits
• The speculation of consumers that wanted to anticipate the shortage
This national supply issue in supermarkets reveals the tensions in regard to business
relationships between French butter distributors, producers and suppliers. The market is
complex and this is due to the high number of actors in the selling process, from the raw
materials to the consumers. The fact that the production of butter has a lot of intermediaries
makes it difficult to enter the market.
The power of the suppliers is very high and the rivalry is strong too in the butter market.
The most competitive firms are big industrial companies that are very powerful. Creating our
own process of manufacturing would be long and costly.
For all these reasons, we do not see a lot of future in the butter industry, as managers
that are currently outside of the business. The forecasts of the butter market are not very good,
and the rivalry of the market is very high, with powerful big brands that have a lot of market
shares.
We saw that the domestic market is not interesting enough for us, but at the same time, butter
has known a worldwide increase, like in China, where French butter is very appreciated. Maybe
it could be a solution to interest ourselves in a market outside of France.

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