Dairy market outlook

November 2019

Overview

  • Growth in domestic milk production in 2020 is expected to be limited due to a smaller dairy herd and lower growth in yields
  • The current firmness in global dairy markets is projected to continue into the first half of 2020 as supply growth remains below demand
  • The potential for disruptions to trade, arising from Brexit and US trade policy, may cause prices in the UK to diverge from global trends
  • Dairy consumption has shown some growth in the past year, with losses in liquid milk consumption offset by growth in cheese and yogurt.

Production

GB milk deliveries have been running high for most of the 2019/20 season, although they have moved more in line with the 3-year average since August.

Yields were boosted by the increased use of concentrates early in the season, while good weather, strong grass growth and good cow condition all gave a lift to spring and summer production.

With production for the remainder of the 2019/20 season more reliant on silage, yields are expected to be slightly down on year before levels. Overall, full season milk production is estimated to be 0.5% up on 2018/19.

Trade

UK cheese and butter exports have both shown strong growth so far in 2019. Cumulative volumes to September are up by 9% for cheese and 14% for butter.

Virtually all of the growth in exports were from increased sales to the EU markets. Some of this uplift may have been stock building in response to the risk of tariffs in the event of leaving the EU without a trade deal.

In terms of imports, 4% more cheese came into the UK in the first nine months of 2019 compared to a year earlier, while butter imports were down 6%.

The additional cheese imports were predominantly cheddar from Ireland, and arrived in advance of the March Brexit deadline. There was no growth in cheddar import volumes between April and September.

Butter imports also rose significantly in advance of the March Brexit deadline, driven by imports of bulk/block butter, which rose 45% year on year in the first quarter. With high volumes in stock, imports then dropped 29% in the second quarter (Apr-Jun), meaning cumulative imports for the first three quarters were down overall from last year.

What next?

Looking ahead to 2020/21, milk production is expected to drop as a result of a smaller milking herd and lower growth in yields than seen in 2019/20.

Despite some firmness in pricing, production growth is likely to remain subdued as farmers look to recover margins lost to higher feed costs in 2018/19.

There has been some recovery in milk production in Australia and Argentina, although growth in global milk supplies is forecast to remain around 1% for 2020.

Supply growth is below expected growth in global demand, maintaining support for global dairy product prices, at least into the first quarter of 2020.

The exception may be with whey prices as demand for animal feeds from China will remain low as they continue to struggle with African Swine Fever.

The risk of a hard Brexit remains, which would put pressure on manufacturers who are 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 the liquid sector, there is a higher risk of declining returns as manufacturers look to reduce volumes and recover margins.

Dairy consumption trends

Dairy occasion loss has stabilised and, following several years of declines, our dairy consumption is back on the rise, according to Kantar.

The biggest driver of longer-term decline is fewer younger people having hot drink occasions, particularly tea with milk. However, this year’s colder summer has brought about some resurgence in tea consumption.

In addition, losses in liquid milk consumption have been offset by growth in cheese and yogurt occasions over the past five years. 

In the past year, we have seen a slight loss in sales volumes of liquid milk (-0.7% year on year) and yogurt (-0.5%) but good levels of growth in cheese (2.9%), fresh cream (2.5%) and butter (3.9%).

  • Liquid milk consumption is expected to remain fairly static in the short term, with some potential for slight erosion. Continued growth in dairy alternatives alongside changing eating and drinking habits will be offset by growth in the number of households easing pressure on milk volume sales in the longer term. Branded milk is enjoying stronger growth than private label
  • Yogurt has seen a mixed picture in 2019, while fromage frais is in severe decline as concerned parents try to limit sugary desserts for children. The growth areas in yogurt are in big pot and active health variants, while fat-free loses out. Consumption at breakfast is growing, while declining at the evening meal. Handheld yogurts for children are also growing. New variants, with functional benefits such as being high in protein, or offering digestive health benefits, will continue to do well
  • Now that the butter price has stabilised, shoppers have returned to butter, moving away from margarine, eschewing the plant-based trend. Consumers are eating butter in fewer sandwiches but in more toast meals
  • Cheese is enjoying good growth in both value and volume terms, and enjoying particular popularity among millennials, with growth in using for scratch cooking. Cheddar is still performing well but growing less quickly than some of the continental cheeses
  • Work to increase dairy’s relevance among young people should offer further opportunities – particularly when partnering dairy products with ‘host’ foods, such as porridge oats or coffee.

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Dairy: At A Glance poster

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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.