Dairy market outlook

July 2020

Overview

  • Domestic milk production is expected to contract slightly in the 2020/21 season, due to the lower yields experienced during the peak production period. Deliveries in the second half of the year show marginal growth against previous year levels 
  • Demand dynamics will remain uncertain as the domestic retail/foodservice consumption balance adjusts to the lifting of lockdown and return to work 
  • Consumer demand for dairy products at a global level is expected to weaken due to slower economic growth, although the impact will vary by product 
  • The supply–demand imbalance will lead to some stock build-up at a global level, keeping dairy product prices under pressure for the remainder of the year 
  • Trade patterns will be disrupted as economies recover from the pandemic, but also due to the uncertainties linked to Brexit and future trade agreements with key partners. This could cause prices in the UK to diverge from global trends and increase risk for manufacturers

Production

We expect GB milk deliveries to reach 12.44bn litres in 2020/21, down 0.7% on 2019/20, based on our June GB milk production forecast.

The spring flush was somewhat muted this year as lockdown led to a number of farmers reducing production at the request of their processors. We expect the impact of this to continue to be felt over the next couple of months, but with a return to slight year-on-year growth later in the season.

The weather and feed are becoming the main concern, as a dry May affected grass, silage and arable crops. Recent rain in June will have eased the situation somewhat, but it is not yet clear whether it will be enough.

The return of out-of-home demand will play a critical role in how dairy markets develop in the next year, as it accounts for around 20% of dairy consumption (on a milk equivalent basis).

What is not yet known is how long it will take for consumption to return to typical patterns. Three different scenarios around demand recovery have been modelled:

  1. Scenario A describes a gradual reopening of foodservice markets from July, but with retail demand and delivery remaining at elevated levels. The ‘normal’ foodservice/retail balance is assumed to be restored by the end of 2021, with a small increase in retail, due to population growth, and a small drop in eating-out, due to closures.
  2. Scenario B is based on the same assumptions as Scenario A, but with a lag of 3–6 months and a harder-hit economy.
  3. Scenario C is the ‘worst-case scenario’ and assumes the lockdown is extended to the end of 2021 and a harder-hit economy.

Under all three scenarios, GB milk production will remain in excess of domestic demand through the remainder of 2020 and into 2021. The level of the deficit depends on the rate of recovery of the eating-out market.

Under our base scenario (A), the net loss in demand is estimated to be 0.7 million litres per day in the six-month period July to December 2020, compared with the same period in 2019. This demand loss increases to 1.6 million litres per day if there is a delay in the recovery of out-of-home consumption (scenario B).

Trade

In general, UK dairy exports and imports have been growing over the past decade in line with growing milk production. During the first four months of 2020, UK trade volumes fell from previous year levels for most dairy products. This is, however, in comparison with elevated trade volumes in advance of a potential hard Brexit.

At a global level, milk supplies are forecast to increase by just under 1% in 2020. Global demand, however, is expected to remain subdued for the remainder of the year, leading to a build-up of inventories and increased competition in export markets.

While many key importing countries are starting to reopen, albeit at different rates, there is little chance demand will return to full capacity during 2020. In addition, the slowdown in the global economy will restrict consumer spending, both in and out of the home, limiting growth in import demand.

Predictions for global trade are gloomy, with the World Trade Organisation expecting, at best, a 13% drop in merchandise trade for the year, due to the impact of lockdowns and lower economic activity in the next 12–18 months.

Adding to this, the risks associated with Brexit remain. Increased difficulties in securing export sales, whether due to heightened competition or weaker demand, could lead to a build-up of domestic stocks.

Helping to counterbalance this will be the speed at which domestic demand returns and how trade agreements develop, which will be critical in determining the level of import competition the industry will face.

What next?

Looking ahead to the remainder of 2020/21, milk production is expected to be 0.7% down overall. This is primarily due to the lower milk production experienced through the peak. The dry weather in the spring may also impact on yields, if feed quality and availability is affected.

Growth in global milk supplies for 2020 looks set to remain at around 1%.

Global dairy product prices are expected to remain under pressure as higher unemployment, lower disposable income, and continued restrictions on mobility hamper demand.

Global trade is expected to be lower in 2020 and 2021.

The risk of a hard Brexit remains, which will put pressure on manufacturers reliant on selling into EU export markets.

UK dairy product prices may move out of line with global price trends as it adjusts to a new trading environment post-Brexit.

For farmers supplying into the foodservice sector, or highly involved in liquid milk markets, there is a higher risk of depressed returns as manufacturers look to recover margins and out-of-home consumption remains weak.

Dairy consumption trends

Prior to the COVID-19 pandemic, performance in the dairy category had been mixed. Milk, the largest segment by volume, had seen volumes decline by -1.9% in the 52 weeks to 23 February 2020 (Kantar). Yogurt had seen a similar volume decline but cheese and butter remained buoyant, each achieving growth above 3%.

During lockdown, all dairy categories saw elevated retail sales, particularly butter where a growth in home baking led to volumes rising 29%. In the first four weeks of lockdown alone, there were 22 million more sweet baking and 14 million more savoury baking occasions (Kantar Usage).  Scratch cooked meals also grew by 44% in lockdown.  The growth of both butter and cheese came from the movement of 170 million lunches back to the home, with sandwiches being key. Also, the sharp growth in hot drinks served in the home impacted milk demand. 

The closure of foodservice impacted cheese and butter with both being highly dependent on the eating out market. And while cheese volumes increased through food delivery channels, with some major pizza chains staying open throughout lockdown, some speciality cheeses faced difficulties because of their reliance on foodservice markets.

Yogurt volumes grew by 4% in the 12 weeks to May 2020 (Kantar), considerably behind the growth of the total food and drink market (+14.7%). Health has become less front of mind during the pandemic as consumers have turned to more indulgent snacks such as biscuits.  In-home usage data from Kantar shows that the breakfast occasion has become more crowded as hot options such as full English and bacon/sausage baps gain traction with more available preparation times in the morning, pushing yogurt down the rank order.  Public sector catering is a relatively important channel for yogurt, accounting for approximately 8% of volumes in 2019, according to AHDB estimates.

What next?

As a staple product, we expect milk to fare well in the latter half of 2020 under all three lockdown exit scenarios.

In scenario A, retail volumes remain high, which compensates for losses in the eating out market, resulting in overall milk volumes being up approximately 2%.

The key channel for milk use in the home is hot drinks (65% of occasions typically) and cereal (28% of occasions) – both uses are expected to maintain their current buoyancy.

Growth is maintained, under scenarios B and C, but slows to +1% in the worst case scenario C.

Growth in the food delivery market continues to benefit cheese in scenario A, though not enough to offset eating out losses, with overall volumes of cheese predicted to be down approximately 3% for H2 2020. Prolonged disruption to the eating out market in scenarios B and C would result in these volume losses accelerating to -7% and -11% respectively. 

Butter is also affected by losses in the eating out market. However, under scenario A, growth in retail compensates for a large majority of the eating-out losses, with AHDB predicted volumes losses in total market of only 1% in H2 2020. The picture does worsens under scenarios B and C, with prolonged disruption to the eating out market resulting in losses accelerating to -4% and -6% respectively.

Yogurt sees volumes remain flat under scenario A, with any gains made in retail offset by losses in schools and other public sector catering. In scenario B this is again the case but in scenario C, the scenario with the longest closure to public sector catering, AHDB predicted yogurt would see declines of -1% in H2 2020. There could be a potential upside as post-lockdown consumers see weight-control return as a consideration. 

To mitigate losses:

  • Pivot to products used in scratch cooking. Cheeses used in cooking have done well during lockdown and we would expect scratch cooking to continue growing in popularity, particularly as we head into a recession. Recipe inspiration is key here. There is a real opportunity for helping consumers to replicate food service experiences in home
  • 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

For more information on the scenarios please click here

Visit the retail and consumer page for more insight.


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Gallery: Dairy at a glance

Click the thumbnails below for simple visual explanations as to how the dairy markets have performed, according to the latest data. Here we look at UK prices, producer numbers, consumption, production and trade figures.

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