Dairy market outlook - the longer view

By Patty Clayton

Dairy markets survived the trials presented by Covid and Brexit in 2020. We can now breathe a sigh of relief that we have a trade deal with the EU, securing our largest export market for the future. However, there are still some challenges on the horizon as dairy adapts to new ways of working.

• Trading with the EU will become more complex, adding cost and barriers to the movement of goods and services
• The pursuit of new trade deals will expose the UK’s agricultural sector to increased competition, both in terms of imports and access to export markets
• The shift in government support to payments for public goods rather than production will increase the emphasis on efficient resource use and adoption of new technologies
• The environment credentials of food production will come under increased scrutiny as consumers put more importance on sustainability in making food choices

The entrance into 2021 wasn’t just the start of a new year, but was also the beginning of a year of substantial change for farming. The boundaries of our markets have been redrawn after our exit from the EU. New trade deals are being forged, the transition to a new method of farm payments has begun, and consumers buying habits are being transformed in the wake of health and environmental concerns.

Dairy farming in 2021, and beyond, will be shaped by these changes, and its ability to adapt will be critical to its success. With so many uncertainties on the horizon, keeping on top of farm performance will be critical, and provide the resilience to adapt to the ever-changing market and policy landscape. 

EU exit

As of 1 January 2021 the UK will operate outside of the EU common market, although the Trade and Cooperation Agreement (TCA) ensures no tariffs or taxes are applied to goods moving across borders. However, the increased complexity of trading with the EU will mean higher costs for doing business there, and will likely result in a reduction in the overall volume of trade. There will also be new barriers to the movement of services and labour between the UK and the EU.

Many dairy businesses, especially those dealing with perishable products, may need to change their operations to adapt to the increased costs of selling into EU markets. This could lead to some product reformulation, a shift in operational focus, or in some cases, investments in new capacity.

For example, the added cost and higher risk of shipping fresh products such as bulk cream to the continent may provide an incentive to utilise the cream to produce more butter in GB, potentially increasing our self-sufficiency. 

Another area impacted by our exit from the EU relates to access to labour. Increased difficulties in securing skilled labour could increase costs, both in terms of recruitment and wages. This highlights the need to invest in staff through training and development for long-term benefits, a central aim of the agricultural Skills Strategy.  

World trade

Leaving the EU allows the UK government to strike new trade agreements. Talks are already in progress with the USA, Australia and New Zealand, while continuity agreements are already in place with Japan and Canada. These deals will provide both opportunities and threats to our dairy industry, easing access to key import markets, but also opening our markets to competition.

Trading on an even footing with our key competitors means our costs of production will need to be comparable, or better, to ensure we are able to grow our markets, both domestically and abroad. This applies across the supply chain, and highlights the need for alignment along the chain to ensure milk is produced efficiently and in line with what processors need to capture efficiencies and achieve maximum value from the market. 

Agricultural policy

While dairy farm incomes are less reliant on direct payments than other livestock sectors, the phased replacement of these with environmental payments will impact future farm incomes. The shift in focus to the provision of public goods, in line with the more general trend towards sustainability, is likely to affect the relative contribution of payments to overall income, and may shift the balance between food vs environmental output.  

Looking forward, this raises the importance of having clear, agreed methods for measuring and monitoring environmental impacts, particularly around such areas as carbon emissions and water use.

The move by both the government and the industry towards Net Zero, combined with the enhanced consumer focus on dairy’s impact on nature, mean farming will need to focus on minimising resource use while maximising efficiencies. In many cases, minimising the environmental impact is compatible with cost savings, making the decision relatively straightforward. More challenging will be the environmental challenges that lead to higher costs. This will increase the importance of access to new technology and the design and implementation of policy measures. 

Consumption shifts

With the road to ‘normality’ after coronavirus looking to be a long one, the return of foodservice demand will be gradual, subject to the success of vaccine rollouts. Combined with increased trade friction, dairy markets will be in a phase of adjustment for at least the first half of 2021, and possibly beyond, depending on how the economy performs.

This highlights the need for the industry to be adaptable, but also that there remains risks to profitability. For farmers, it will be important to understand the risks facing their buyers, and their buyers’ markets, to assess the potential for price trends. Again, this highlights the need for farms to know and control costs during this period of uncertainty.

Looking further ahead, consumer demand requirements are shifting, and while price and quality will remain important in making purchase decisions, the environment credentials of food production will come under increased scrutiny. This will be a key factor in which companies and products survive – both in terms of winning contracts and winning consumers.

Adding to that, there is the trend of consumers’ reducing their red meat and dairy consumption because they believe it is healthier and less harmful to the environment. As an industry, it will be important to be able to evidence the credentials of dairy in a transparent and balanced way, underscoring the importance of well-designed policies.

Summary

In the long term, dairy has lots of potential to grow its markets; it is a healthy, nutrient dense food and the UK is well placed with the natural resources and conditions to produce it in a sustainable way.

Crucial to its successful and sustained development will be its ability to prove its sustainability credentials, and for the supply chain to be able to deliver those environmental requirements in a cost-efficient manner.

There are a number of AHDB tools available to help navigate the upcoming challenges:

• Our Business Impact Calculator helps farm businesses understand how BPS payment reductions will impact their business
• Take a look at Preparing for Change: The Characteristics of top Performing Farms
• Keep an eye on our website for the latest market prices and information
• We have a range of tools to help, including budgets and forecasting, managing cash flow, cost of production and our KPI calculator
• Find seasonal labour, access a ‘new employee checklist’ and get pointers for training your team for business success 
• Use the new AMPE/MCVE calculator to look at the value of your milk in the market