Dairy market outlook
- Domestic milk production is expected to grow slightly in 2021, as it starts the year with strong yield growth. This assumes no restrictions on spring production, unlike in 2020.
- UK demand dynamics are still uncertain, but a successful vaccination program should enable a return to relative normality by late 2021.
- Demand at a global level is mixed, depending on each country’s pandemic management and economic recovery.
- The continued impact of the pandemic on the supply/demand balance could keep some pressure on prices in the first part of the year.
- The EU deal is positive news for UK dairy trade, but trade friction will still have an impact, particularly on short-shelf-life products.
We are currently expecting GB milk production to total 12.56 billion litres for the 2020/21 season, up 0.2% on 2019/20*, according to our December forecast. For the calendar year 2021 we’re forecasting 12.59bn litres, up 0.5% on 2020*. Production was strong at the tail end of 2020, with strong yields from September to the latest data. This supported production going into the New Year. It is expected that growth in yields will offset the long-term downwards trend in herd size. (For more information on herd expectations, see our beef market outlook)
The restrictions put on production last spring are not expected to be repeated in 2021, due to the difference in lockdown timing and as the industry has adapted since last year. Therefore, the spring flush (April-June) is projected to be up 39 million litres (1.2%) on 2020. However, processing capability could still be a concern if, among other factors, foodservice demand remains limited, or coronavirus increases absenteeism in plants. If the country stays locked down, in theory, capacity should be sufficient to get us to mid-April, provided absenteeism isn’t higher than it was during spring 2020. However, should the government start easing restrictions from March, as hoped, the increase in foodservice demand could increase processing capability.
Out-of-home demand is a key area of uncertainty for the dairy markets, and how soon it is able to return to relative normality will be a key factor in the development of the dairy markets in 2021. We are currently better placed than we were in the first lockdown, as a number of foodservice outlets have been able to maintain some business through delivery and takeaway. However, demand will still be limited by these restrictions, advice to stay home, and the reduction in schools and hospitality catering.
Thanks to the vaccination program, the route out of this latest lockdown seems more certain. Our current expectation is for lockdown-type conditions to remain in place for most of Q1, followed by a gradual easing of restrictions, and with a ‘new normal’ restored in H2. We expect to see elevated retail demand continue while restrictions persist, then out-of-home demand will rise as restrictions ease. However, it is unlikely to fully return to pre-lockdown levels in 2021, as some consumer wariness will persist after easing. So far, higher retail demand has offset some, but not all, of the lost foodservice demand, and we would expect this to continue.
The coronavirus pandemic disrupted trade in 2020 and is likely to continue to do so into 2021. UK total dairy exports were down 11% on the year for January-November 2020, and imports were down 7%. This came in part from delays at ports and borders, and in part from reduced demand for imported product. Reduced demand from the foodservice sector has affected import demand both here and abroad. These issues will continue into early 2021, but will hopefully diminish in the latter part of the year as the pandemic situation improves.
The agreement of a trade deal with the EU, in which no quotas or tariffs will be charged, is welcome news for the UK dairy market, as the vast majority of our dairy imports and exports are traded with the EU. However, there is now additional trade friction from new requirements for paperwork, health certification, etc. This will add extra time and cost to trading. This is of particular concern for cream and skim concentrate, as the short shelf life of these products means there is limited time to procure the necessary paperwork to export. Exporting excesses of these products to the EU is a key part of balancing the UK milk market, and so gives some potential for disruption. If this balancing was disrupted during the flush, when processing capacity is tight, it could put pressure on the markets.
On the import side, there are a few more month’s grace where the paperwork changes aren’t required until staged changes in April and July 2021, but companies will still have to adjust. This grace period will hopefully prevent the teething problems seen on the export side, but may just delay them.
On a global level, trade will be dependent on recovery. The World Trade Organization (WTO) revised their world merchandise trade volume projections in October 2020. They forecast a 9.2% decline in the volume of world merchandise trade for 2020, followed by a ‘weak recovery’ of a 7.2% increase in 2021.
Global milk supplies from the main dairy exporters are forecast to show moderate growth in 2021. It is hoped that vaccinations and economic recovery will improve consumer confidence as the year progresses. There has been firm demand from countries that have been able to control the virus and are seeing economic growth. Those that are still struggling with outbreaks and depressed foodservice demand continue to be at risk of economic downturns, which could affect import levels through 2021.
Global prices ended 2020 relatively strong thanks to rallies in Q2 and Q3. Lower inventories in Europe and the US by the end of 2020 have also helped support prices. However, until there has been sufficient recovery in markets to restore a good supply/demand balance, the pandemic will continue to inhibit positive price movements.
2021 milk production is expected to be 0.5% up on 2020* overall in GB. This is partly due to the curbing of the 2020 spring flush, which is not expected to be repeated in 2021. Strong yield growth towards the end of 2020 also supports 2021 expectations. Spring weather, and its influence on the flush, will be a key watch point going forward. There is unlikely to be the spare capacity to cope with a bumper spring.
Growth in global milk supplies from the top exporting regions is currently expected to be around 1% for 2021.
Global trade is expected to continue growing long term, but could see continued bumps in the road in 2021.
Our markets are still adjusting to the new EU trade rules, particularly on the export side. The additional trade friction will add cost to trading, which will in turn put pressure on prices. On the positive side, this additional cost is still much less than if we’d also had tariffs to contend with.
There are still areas of uncertainty. For example, if difficulties with exports continue, from lower demand or trade friction, this could keep more product on domestic markets. If there are delays or setbacks to the recovery in foodservice demand, this will keep a lid on liquid prices. However, as supply growth is modest and there are positive signs that demand will recover later in 2021, the outlook for farmers’ incomes looks relatively good. Of more concern will be an expected increase in on-farm costs. Feed, fuel and fertiliser prices are expected to increase over the course of 2021. To find out more, please see our inputs outlook.
*2019/20 and calendar year 2020 are both leap-year adjusted to reflect 365 days equivalent
Dairy consumption trends
Through 2020, all major dairy categories have seen retail growth in both spend and volumes. This differs from 2019 where total dairy struggled to find growth, due to lacklustre performance in milk and yogurt.
Increases in cooking from scratch has benefitted a number of dairy categories. Butter, cream and cheese all saw double digit growth in 2020. Fresh cream was the fastest growing dairy category with retail volumes up 22.8% (Kantar, 52 w/e 27th Dec 2020). Shoppers increased how often they bought cream, with an average of 14.2 times in the year compared to only 12.6 in 2019. Health was less of a priority for many during 2020 so consumers treated themselves and upgraded the everyday with dairy.
Butter benefitted from baking trends last year, seeing volume growth in retail of +18%. Increases in at-home lunches and sandwiches in particular have benefitted butter and cheese. Through 2020, cheese saw volume growth in retail of +15%. Cheeses which saw the fastest growth were mozzarella, paneer and halloumi, but cheddar still accounted for just under half of volumes gains. The closure and restrictions on foodservice are likely to have impacted cheese and butter. Certain cheeses, such as mozzarella, will have seen increased demand from the foodservice market as, despite closures, some dishes have seen growth. For example 6% more pizzas were sold this year compared to last, driven by takeaways (AHDB/Kantar Out of home, 52w/e 4th Oct 2020).
Milk saw strong volume growth at +7%, accounting for 65% of dairy retail gains. The uplift predominantly came from increased volume per buyer. Milk at home was boosted by an increase in hot drinks occasions as we spent more time at home and less time on the go.
In retail, yogurt grew by +6% in volume, however this was behind the total market so overall lost share. With health less of a priority this year and increases in hot breakfasts, yogurt struggled to find the growth which other dairy categories have seen.
As a staple product, we expect dairy to continue to do well in to 2021. However, as 2020 was such an extraordinary year for grocery, many categories will struggle to see year-on-year growth compared to last year.
Some of the trends that emerged during 2020 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, even after the latest lockdown eases, so we expect there to be more at home meal occasions, especially for drinks, snacks and lunches through the year.
As a result of these anticipated trends, we expect all major dairy categories to see growth in retail volumes compared to 2019.
The increase in hot drinks at home will benefit milk, which we expect to grow +5% on 2019 levels. However, this year, there will be less panic buying and hopefully the lockdowns will start to ease as the vaccine is rolled out so we predict milk volumes will decline -1% compared to 2020.
Yoghurt will continue to see elevated levels in the first half of the year as we have more lunches and snacks at home. But as we go in to a new normal in the second half of the year, we could see the declines we saw in 2019 start to creep back.
Butter and cheese sales through retail benefitted from the closure of workplaces and foodservice and we expect this to continue for lockdown 3 and beyond as many consumers are still tentative about returning to the office and eating out as much as they did before. Both categories will see strong growth on 2019 levels, but perhaps not so much volume passing through retail as in 2020.
To mitigate losses:
- Pivot products for use in scratch cooking. Cheeses used in cooking have done well. Growth for speciality cheeses, cream and yoghurt could be found by expanding consumer repertoires to use in scratch cooking and more savoury dishes. Recipe inspiration is key here
- To make the cooking experience easier and more convenient many restaurants have pivoted to providing at home meal kits. There is a real opportunity for helping consumers to replicate food service experiences in home
- With children at home for the early part of 2021, encouraging baking and savoury cooking with the family could be a short term win for dairy. Also, encouraging healthy snacks for children such as yogurts and cheese
- Although health took a backseat in 2020, we expect it to return to growth this year, so address underlying concerns by communicating a healthy and natural message
- In the longer term look to maintain and build consumer trust, demonstrating where farming values (animal welfare, environmental stewardship and expertise) are shared with consumers
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