Dairy market outlook
- GB milk production is forecast to end the 2021/22 season down on the year, with only modest growth in calendar year 2022, as high input costs impact yields.
- Input costs are likely to remain high for at least the first part of 2022.
- The domestic demand balance between retail and foodservice is expected to gradually shift in the direction of pre-pandemic levels, though Omicron will delay this transition to later in the year.
- Tight global milk supplies are expected to keep international markets supported.
- UK imports will likely be up compared to 2021 as foodservice demand returns.
- Overall, wholesale and farmgate prices are likely to remain supported through the first part of 2022.
Domestic milk production
GB milk production is forecast to total 12.5bn litres for the calendar year 2022, up 0.3% on 2021, according to our December forecast. Additionally, the milk year is predicted to total 12.4bn litres for the 2021/22 season, down 1.2% on 2020/21. This is a notable reduction compared to previous forecasts for the season, as milk production has been struggling since the summer. Yields were unexpectedly low in the latter part of 2021, and as it will take some time for them to recover, this also impacts our 2022 forecast. Although 2022 production is expected to be slightly up on 2021, the 2022 forecast is still 0.6% lower than 2020.
We usually see yields steadily growing year on year, driven by a long-term trend of improving herd genetics and improving farming practices. However, from July 2021 the growth in yields fell back, turning negative at the end of the year. Labour shortages and high input costs in 2021 both played a part in reducing yields. Increases in milk contract prices, announced from November onwards, may help incentivise higher yields, if they can outpace input costs. However, once yields are reduced it is hard to bring them back until a cow calves again. Therefore, we’re expecting the reduced yields of 2021 to continue into 2022. Improvements should begin to come through in the spring, keeping production in the latter half of the year closer to H2 2020 levels than those seen in H2 2021.
As for our milking herd expectations, we have projected a continuation of the long-term trend of gradual decline. There is an increasing number of youngstock in the wings, but the current economic situation is not conducive to an expansion of the national herd. We therefore expect that the older and/or less productive cows will be culled to make room for the newcomers.
Input costs impacting yields
Rising input costs were a key driving force in 2021 and will continue to be the case into 2022. Processors and farmers alike have been feeling the strain, with the costs of fuel, energy, fertiliser, labour, packaging, and transport all running high. Unfortunately, there is no indication of relief from this trend, at least in the near term.
Most of the increase in concentrate feed prices occurred in the first half of 2021, remaining at high levels in the second half. Reports indicate that silage quantities were good in 2021, but the quality was highly variable, increasing the need to buy in expensive supplements to maintain yields.
The pressure on feed prices looks set to continue into 2022. Tight global wheat supplies and weather concerns in South America will add further upward pressure to grain, maize and soybean prices. Overall feed ingredient markets are set to stay supported through the first part of 2022.
Agricultural price indexes show that, up to October, dairy output prices were increasing in line with input price rises. While the recent higher milk prices will hopefully cover increased costs, they may not be enough to incentivise expansion as would normally be expected.
However, if costs are covered by the price increases, yields could recover from their lowered state, gradually returning to year-on-year growth through the spring. The rest of this milk year’s fate is set, other than the impact of weather, but next milk year should bring a chance to pick yields back up – though not all at once.
Find out more in our inputs outlook.
Global milk production
The UK isn’t the only dairy market struggling with low production. Global milk supplies from the key dairy exporting regions are set to remain tight in 2022, forecast to grow by just 0.6%. This is on the back of minimal growth in 2021, with several key EU countries running behind expectations and a disappointing flush in New Zealand and Australia.
As in the UK, high input costs, labour shortages and increasing greening requirements are offsetting the impact of what are currently strong milk prices at a global level. This means there is little incentive for farmers to push for higher yields.
The limited increase in milk supplies will continue to support current price levels, with some potential for further increases as demand continues to recover to its pre-pandemic levels. There are, however, some risks of softer demand from further coronavirus outbreaks, high prices or reduced purchasing if buyers start to no longer feel the need to hold security stocks.
UK dairy product availability
UK production of butter, cheese and milk powders are all ahead of last year for the Jan-Nov 2021 period. This lift has come partly from slightly higher milk deliveries in the first half of the year, and partly from a reduction in milk going into yogurt and liquid milk.
Although production changes have contributed to the shifts in available supplies, changes in imports and exports have had a much bigger influence. The UK’s exit from the EU significantly disrupted dairy imports and exports, with the ongoing pandemic a compounding factor. As of November 2021, year-to-date exports of most dairy products were down 13-28% on Jan-Nov 2020, and imports were down 7-27%. The exception to this is the ‘milk and cream’ category, which is predominately milk crossing the Irish border, which has been less impacted due to the NI protocol.
For our three key products (butter, cheese and milk powders), the drop in trade was the key factor in how product availability changed in the first half of 2021, as production was slightly up for all three. In the latter part of the year (Jul-Nov 2021), this was still true for cheese. For butter and powders, production and trade were more similar to Jul-Nov 2020 – but availability was still down overall.
Looking forwards, lower milk production will hamper product production, though the flush should still ease some of the tightness short-term. For powders in particular, high energy costs will weigh on product returns, keeping production restrained in the absence of increased market prices.
Lower milk production and tighter product availability have been supporting wholesale price increases through the latter part of 2021, across UK, EU and world wholesale markets. With global supplies expected to remain on the tight side, market prices will remain supported as there will be little opportunity for stock build up. There may be some seasonal easing in prices during the northern hemisphere spring flush, but the magnitude of that flush will be a key watch point for the season ahead.
Domestically, the balance between retail and foodservice demand will also influence prices. Foodservice demand shifted into retail during the pandemic, but this is expected to reverse as we move out of restrictions. Although the recovery of the foodservice sector in the first part of 2022 is likely to be delayed by the Omicron variant, it is expected to pick up pace through the latter part of 2022.
A detailed analysis of dairy consumption trends from our retail and consumer insight team is available below.
With a low stock situation, and rising foodservice demand, imports will start to increase through the year. This will particularly be the case for cheese, as foodservice demand tends to favour lower cost supplies. With limited growth expected in domestic cheese supplies, this will push up import demand, and have a limiting effect on price increases.
The ability to import to offset any domestic shortages keeps UK prices in line with global trends, although the introduction of import controls on EU product coming into the UK from January may slow the flow of product, keeping availability tight and prices supported.
What does this mean for farmgate prices?
With high prices on the wholesale markets, we have seen these increased returns passed on from processor to farmer in the form of increased farmgate prices. Our analysis indicates that these returns are likely to have been passed on more quickly than usual, forming the basis for the flurry of large price increases seen between November 2021 and February 2022. With milk supplies so tight, processors are keen to encourage increased production – or at least prevent further decreases.
Overall, markets look set to remain firm given the limited production possibilities and a positive outlook for demand. Prices should remain firm in the first part of 2022 as the market conditions supporting them look set to remain.
Potential pressures on prices could develop in the event of a strong spring flush in the northern hemisphere, or a drop in global import demand. With high rates of inflation, we could see demand from price-sensitive importing regions fall, while China’s buying could slow if they no longer see the need to hold high levels of security stocks.
Dairy consumption trends
Throughout 2021, with many people continuing to work from home, varying levels of restrictions and the reopening of restaurants, all major dairy categories have declined in both retail spend and volume when compared to the exceptional year of 2020 but remain elevated compared to the pre-pandemic picture.
As people ventured out more in 2021, yoghurt drinks became the fastest growing category, with retail volumes up 11.8% year on year (Kantar, 52 w/e 26 Dec 21), buoyed by a 34.2 percentage point growth in household penetration. Whilst fresh dairy cream experienced the smallest decline on 2020 with retail volumes down 0.5%, in-home cream consumption remains significantly elevated compared to pre-pandemic levels, at +21.3%. As restrictions eased, health crept back up the agenda for some consumers and they may have cut back on indulgent products like cream during 2021 compared to 2020’s lockdowns.
Increases in at-home lunches have buoyed dairy categories, with home-made sandwiches benefitting butter and cheese throughout the pandemic. Butter saw volume decline in retail of -1.8% during 2021 as foodservice reopened and consumers returned to the office or hybrid working. However, retail volumes of butter remain significantly elevated compared to pre-pandemic levels, at +16.5%. Throughout 2021, dairy cheese saw volume declines in retail of -1.3%, with Cheddar (-3.5%) driving most of this decline because of its large share of the market – Cheddar accounted for 49% of total cheese volumes sold during the 52 w/e 26 December 2021. Compared to 2019, volumes of cheese are up 13.5% showing that the pandemic is still having a strong impact on retail sales. Speciality and continental cheese experienced the greatest growth, especially Mozzarella at +6.5% compared to 2020.
The pandemic generated an increase in at-home hot drink occasions, benefitting milk. However, with foodservice reopening and more consumers returning to the office at least some of the time, milk has experienced retail volume decline of 0.8% year on year. However, when comparing back to 2019, milk is up 5.8%, meaning there was an additional 302m litres more milk sold.
In retail, dairy yogurt volumes declined by 1.6% year on year but were up 4.3% on 2019 levels. Fat-free and split-pot yogurt saw some of the biggest volume losses, down compared to both 2020 and 2019 levels, whereas big pots of plain yogurt and active health saw growth year-on-year and versus pre-COVID-19.
As a staple product, dairy will continue to do well into 2022. However, as 2020 was such an extraordinary year for grocery, growth throughout 2021 slowed overall and started to decline against 2020. However, this is not a gloomy position given the dairy category will remain elevated versus 2019 in retail.
Some of the trends that emerged throughout the pandemic are expected to continue through the next year. While dipping slightly during 2021, consumers are likely to cook more meals from scratch, particularly as budgets are likely to remain stretched with inflationary rates rising and low consumer confidence. As working from home rates remain elevated, we expect there to be more at-home meal occasions, especially for drinks, snacks and lunches through the year compared to 2019.
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 +1.6% on 2019 levels. However, we expect milk volumes to decline 4% on 2021. If inflation rates were to increase the price of milk, we could see further volume declines, although as cows’ milk is a much cheaper option compared to alternatives such as oat or soya, its unlikely consumers would switch from dairy to non-dairy milk.
Yoghurt is expected to see elevated volumes through 2022 at +1% compared to 2019 and we expect this volume increase to be maintained throughout the year, especially if health creeps up consumer agendas.
Butter and cheese sales through retail benefitted from increased working at home and food service restrictions in 2021. As more people become fully vaccinated, confidence about eating out is likely to increase and we expect to see a decline for both cheese (-7%) and butter (-10%) in retail compared to 2021. However, both categories will see strong growth on 2019 levels, of +6% for cheese and +5% for butter. Butter sales are very reactive to price, therefore if inflation were to increase the cost of butter, we may see consumers switching to cheaper alternatives such as margarine and spreads.
For 2022, AHDB predicts these trends will continue as we see retail and foodservice continue on its path back to normality. Overall retail dairy sales volumes for the full year 2022 are expected to be down versus 2021 but up slightly versus 2019, at +2% for milk, +1% for yogurt and more prominently +6% for cheese and +5% for butter.
Foodservice sales will offset some of the lower retail sales but changes in consumer work patterns and pressures on household budgets mean the return to pre-pandemic levels of eating out is unlikely to occur during 2022.
To maintain momentum:
- As consumers feel the economic pinch, encourage dairy consumption in lunch boxes (cheese, butter, and yogurt) for those returning to the office and provide recipe inspiration for quick home-made lunches that include dairy for those who continue to work from home.
- Health has risen back up the agenda for some consumers. There are opportunities to promote and innovate healthier dairy products, such as encouraging consumers to substitute Greek yogurt for cream or developing more fermented product lines like Kefir or Kombucha. Promoting the health benefits of dairy produce as a source of B12 and iodine, for example, could also tap into this trend.
- There is a need to reassure consumers who may be turning to dairy alternatives about the health, environmental and welfare credentials of dairy.
- 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. See our consumer reputation landscape hub for more information.
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