Bright spots in dairy market tempered by rising costs

Growing retail sales and export potential are two bright spots in the dairy market outlook.

However, rising farm production and processing costs, along with competition from alternatives, will continue to challenge the sector.

These were the main messages from a panel on future dairy markets at UK Dairy Day on 15 September.

Chaired by Hugh Pocock of Cultura Recruitment, the panel included market analysts, producers, and industry representatives from AHDB, Marks & Spencer and the NFU.

There was a consensus that exports markets hold valuable opportunities for UK dairy products, linking with the recent release of the NFU’s export strategy, which aims to double UK dairy exports in the next 10 years.

Dairy market specialist Chris Walkland was optimistic for rising farmgate milk prices, but had a more neutral outlook for margins. He said that prices that go up are undermined by the costs that increase alongside them.

Milk consumption

The panel discussed the increasing use of milk alternatives and the effect this may have on milk consumption.

Mr Walkland said: “If liquid milk consumption falls, and that milk can be diverted into a more profitable outlet then that could be good for the industry.”

“I’m not really worried about liquid milk consumption because no one makes any money out of liquid milk. The retailers don’t make any money and the processors don’t make much either. As far as the farmers are concerned the cheese market is outperforming liquid markets.

“So, if the amount of milk sold into the liquid market falls and is then diverted into more profitable cheese, butter, powder markets and more money comes into the industry, then there isn’t a problem.

“If we can export more of those products, in line with the NFU export strategy, then we are not reliant on retailers beating the processors up on prices, because there are far more profitable markets abroad,” Mr Walkland added.

Paul Flanagan, dairy strategy director at AHDB said: “There is a need to reassure some consumers who may be turning to dairy alternatives, of the health, environmental and welfare credentials of dairy. AHDB’s We Eat Balanced campaign that launched this month hits on these messages.”

Retail demand

“Over the next 12 months dairy is expected to perform well at retail compared with pre-pandemic, as consumers continue to work from home, maintaining increased use of dairy products for hot drinks and lunches,” said Mr Flanagan.

“In addition, tighter budgets and weak consumer confidence are expected to sustain the trend towards scratch cooking.

“Through the first half of 2021, as many have continued to work from home, all major dairy categories (excluding alternatives) have seen retail growth in both spend and volumes. This represents a departure from pre-pandemic in 2019 where total dairy struggled to find growth, due to lacklustre performance in milk and yogurt.

“Some of the trends that emerged during 2020/21 are expected to continue through the next year. Consumers are likely to continue cooking more meals from scratch, particularly as budgets are likely to remain stretched and consumer confidence is weak.

Working more from home is likely to be a legacy of the pandemic so we expect there to be more at-home meal occasions, especially for drinks, snacks and lunches through the year, compared to 2019.”

Mr Flanagan added that due to these anticipated trends, he expects all major dairy categories to see growth in retail volumes compared to 2019.