Dairy market outlook

July 2021

Overview

  • Domestic milk production is expected to grow slightly for both 2021 and the 2021/22 season, driven by the strong spring flush.
  • The domestic demand balance between retail and foodservice is expected to gradually shift in the direction of pre-pandemic levels, but retail demand will remain elevated this year.
  • Global markets might face some downward pressure, due to growing supplies from key exporters and a potential softening of China’s strong demand.
  • UK trade has been improving since the initial shock of exiting the EU, but continues to be challenged by Rules of Origin and logistical issues.
  • As UK import demand returns, this could add downwards pressure to domestic prices.

Katherine Jack

Analyst - Dairy

Patty Clayton

Lead Analyst - Dairy

Supply

Milk production

GB milk production is forecast to total 12.58 billion litres for the 2021/22 season, up 0.3% on 2020/21, according to our June forecast. For the calendar year 2021 we forecast 12.56bn litres, up 0.3% on 2020 (365-day equivalent). Higher yields will outweigh the reduction in the milking herd, although yields may be challenged over the winter period if margins remain pressured by high feed prices.

The milking herd is expected to continue its long-term decline in size this year, limiting milk production growth. Youngstock numbers have been rising since 2020, driven by increased use of sexed semen. However, this won’t necessarily lead to an increase in the milking herd, as farmers may use this as an opportunity to cull out older, less productive animals instead. This year’s record high deadweight cow prices are also likely to incentivise a clear-out, especially when coupled with the high feed costs.  

Yield growth continues to drive forecasted production growth, but high feed costs could limit how much farmers push for yield. Production was strong through the spring, unhindered by production restrictions – although somewhat tempered by the weather. Since then however, production has fallen back quicker than forecast, instead running more in line with 2018 since late June. If it continues to follow 2018, it would re-align with the forecast in late August.

After a rocky start, grass growth was abundant between the middle of May and middle of June. However the quality has so far been variable, which will affect silage quality. The need to supplement with expensive bought-in feed over the winter months would strain already tight margins, and could lead to below-forecast deliveries later in the year. Concentrate feed prices have been rising since late 2019, adding extra pressure. Although domestic grain supplies look set to increase this season, the global supply and demand picture is looking tight. If this tightness remains, it will keep some upwards pressure on domestic prices.

For more details on the outlook for feed ingredients, you can see our farm inputs outlook, our cereals outlook, and our oilseeds outlook.

Product availability

UK production of butter, cheese and milk powders are all ahead of last year for the Jan-May period. This lift has come partly from slightly higher milk deliveries, 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 end of the EU exit transition period at the end of 2020 led to a dramatic dip in both imports and exports of dairy products. Top-level figures have been generally improving as the year progresses, but each month remains down on its year-ago counterpart. The exception to this is the ‘milk and cream’ category, which is predominately milk crossing the Irish border, meaning the NI protocol has kept things flowing – both imports and exports are up on the year for Jan-May.

 

For butter and cheese, the drop in imports has been greater than the drop in exports. For butter, this has mitigated some of the growth in supplies that came from production, but overall available supplies remain slightly up on the year (Jan-May). For cheese, the drop in imports is substantial enough to incur a year-on-year drop in available supplies, despite higher domestic production.

The shift in product demand from out-of-home (OOH) to retail during the pandemic has likely been a key driver in the drop in butter and cheese imports. The OOH sector tends to be more price sensitive, and therefore more likely to import commodity butter and cheese. Meanwhile, retailers have tended to stock assured products, favouring domestic suppliers.

Going forwards, we would expect demand from the OOH sector to gradually return to the pre-pandemic status quo (more on this below). With relatively tight domestic availability, and little growth forecast in milk supplies, this could lead to higher imports. This is more likely with cheese as availability is already down year-on-year, and production more likely to be directed to the retail sector. Butter imports may not see as much import demand growth. Difficulties in exporting bulk cream will likely lead to higher domestic production of butter, displacing some imports. 

The picture for powders – that is, SMP & WMP - is quite different to butter and cheese. A significant drop in exports in Jan-May 2021 has led to a large increase in available supplies, albeit from a relatively low base the year before. The UK is typically a net exporter of milk powders, and the increase in available supplies highlights the difficulties EU exit and the pandemic have had on trade. However, current trends in wholesale powder prices suggest that while stocks are growing, they may not be available to the market. It is likely that exports will resume later in the year as the newly implemented administrative requirements become more ingrained, and transport issues are eased.

Demand

Domestic market

Demand for dairy has remained strong through the pandemic but distributed through retail rather than foodservice channels.  As restrictions ease, the expectation is for demand to slowly transition back into foodservice. As such, retail sales are forecast to be lower this year compared to 2020, although remaining above pre-Covid levels.

Dairy is expected to perform well at retail compared with pre-pandemic, as consumers continue to work from home, maintaining increased use of dairy products for hot drinks and lunches.  In addition, tighter budgets and weak consumer confidence are expected to sustain the trend towards scratch cooking.

A more detailed analysis of retail trends by product is available below.

We expect demand from the OOH sector to gradually return this year, although it is expected to remain well below pre-pandemic levels. The ongoing rise in Covid cases, shifting work patterns and lower consumer spending power will all play a role and add uncertainty to the rate of demand increase.

Further growth is expected through 2022, but demand may not fully return to pre-Covid levels due to restaurant closures, the economic back drop and changes to consumer behaviour.

 

Global market

The outlook for dairy demand at a global level remains positive. According to the latest FAO-OECD Agricultural Outlook, per capita consumption looks set to rise across the board. In developed regions, such as Europe and North America, fresh dairy consumption has been declining, but consumption of cheese is expected to grow. In developing countries, rising populations, and increasing income levels will support higher per-capita consumption levels.

In the more immediate future, there are some headwinds for demand in the second half of 2021.  China’s import demand was integral to the strong performance of dairy markets through 2020 and into the first half of 2021. Import levels appeared to be in line with expected growth rates in the first part of the year, although solid domestic milk production growth, and on-going issues with shipping could weaken import demand in the second half. Growing global milk supplies, particularly in NZ, could tip the balance and lead to weaker pricing later in the year.

Emerging variants of Covid also present a risk to demand recovery, particularly in the foodservice sector.

Price outlook

Dairy product price trends have been generally positive so far in 2021, although butter and SMP have started to weaken. Following the UK’s departure from the EU, changes to trade patterns and product availability will play a role in how prices develop through the remainder of the year.

On balance, product stock availability in the UK does not appear burdensome. The continued strength of retail sales, with its preference for domestic product, and the gradual re-opening of the OOH sector should be more than sufficient to absorb the growth in milk supplies for the remainder of the year.

However, as import demand returns, UK product pricing will again be influenced by global trends where there remains some risk of lower prices. How much this transfers into our domestic market will depend on how new import regulations for EU products[i], and on-going logistical challenges, affect the competitiveness of imports.

Dairy prices aren’t the only consideration; both processor and farmer margins are likely to be pressured by high input costs. Processors are dealing with higher energy and labour costs, as well as shortages in packaging materials and freight transport that are affecting the wider supply chain. Meanwhile, farmers have also been dealing with high input costs, particularly around feed and fuel.  We take a closer look at key farm inputs elsewhere in our Agri-Market Outlook, which you can find here.

 


Dairy consumption trends

Through the first half of 2021, as many have continued to work from home, all major dairy categories (excluding alternatives) have seen retail growth in both spend and volumes. This represents a departure from pre-pandemic in 2019 where total dairy struggled to find growth, due to lacklustre performance in milk and yogurt.

Increases in cooking from scratch have benefitted a number of dairy categories. While growth was slightly less stellar than the levels seen in 2020, growth remains very buoyant. Yogurt drinks were the fastest growing category at 18.1% volume growth (Kantar, 52 we 13 June 21), buoyed by a 1.4%pts growth in household penetration. Fresh cream also saw double digit growth, with retail volumes up 12.7%. Shoppers increased how often they bought cream, with an average of 14.2 times in the year compared to only 13 in the previous year. Health was less of a priority for many during the pandemic and consumers wanted to treat themselves.

Butter saw volume growth in retail of +8.9%. Increases in at-home lunches and sandwiches in particular have benefitted butter and cheese, although home baking has dropped off since 2020. Growth has slowed as foodservice reopens but is still significantly ahead of 2019. Through the year to mid-2021, cheese saw volume growth in retail of +7.5%. Regional and speciality cheese outperformed cheddar (although cheddar made up the majority of volume growth due to its size). Mozzarella (31.1%), Paneer (35.6%) and Cheshire (25.3%) saw the biggest volume growth with total cheddar at a more modest 4.0%. The continued restrictions on foodservice are likely to have impacted cheese and butter.

Milk saw strong volume growth at +5.8%, accounting for the bulk 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 +4.8% in volume, however this was behind the total market so overall lost share. Fat-free yogurt saw some of the biggest volume losses. Within the cheese category, Quark also lost significant amounts of volume (-31.5%) year on year demonstrating continued lack of momentum for some of the healthier options.   

What next?

As a staple product, dairy will continue to do well into the back half of 2021. However, as 2020 was such an extraordinary year for grocery, growth has slowed overall and we would expect to see the year overall flat or in slight decline vs 2020. However, this is not a gloomy position given the dairy category will still be significantly elevated vs 2019 in retail.

Some of the trends that emerged during 2020/21 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 so 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 +6% on 2019 levels. However, this year, behaviours are more settled and we expect milk volumes to be flat on the previous year.

Yoghurt will continue to see elevated volumes through 2021, compared to 2019, although growth will begin to reduce as we head more towards normality in winter. We expect the year to end down by 1% on 2020 levels.

Butter and cheese sales through retail benefitted from increased working at home and the closure of food service in 2020/early 2021. As more people are vaccinated more people will feel confident about eating out and we expect to see a decline of 2% for both cheese and butter in retail compared to 2020. However, both categories will see strong growth on 2019 levels, of 13% for cheese and 16% for butter.

For 2022, AHDB predicts these trends will continue as we see retail and foodservice continue on its path back to normality. Out-of-home will not return to pre-COVID levels this year and retail sales of dairy may start to suffer again as media noise around the industry accelerates. Overall dairy volumes for the full year 2022 are expected to be down versus 2021 but still up slightly (+1%) versus 2019 for milk and yogurt and more prominently (+4%) for cheese and butter.

To maintain momentum:

  • 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.
  • Meal kit services such as Hello Fresh, Gousto and Mindful Chef have thrived during the pandemic. Working with these suppliers to offer suitably packaged ingredients that work well in kits could pay dividends.
  • As restrictions ease it is likely that health will see a resurgence for some. There are opportunities to promote and innovate healthier dairy products. Perhaps encouraging consumers to substitute Greek yogurt for cream or developing more fermented product lines such as Kefir or Kombucha. Promoting the health benefits of dairy produce such as B12 and iodine is also beneficial.
  • There is still plenty of room for indulgence, we expect consumers to be entertaining at home more as an alternative to eating out while high levels of the virus are in circulation. There are opportunities to promote cream, cheese and butter as natural, minimally processed products with an authentic and delicious taste.
  • There is also a need to reassure some consumers who may be turning to dairy alternatives of the health, environmental and welfare credentials of dairy.

Visit the retail and consumer page for more insight.


[i] Current timeline for EU import regulations is for paperwork requirements (such as health certificates) to come in on 1 October 2021 and physical border checks to come in from 1 January 2022.


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