At the beginning of the year, the market value of UK milk was experiencing its most stable period in over a decade. The FAO-OECD forecast for 2020, predicted a modest global production increase of 1% and for demand to grow by 2.1% for fresh product and 1.5% for processed products at a global level, which led to expectations of more of the same. GB milk production was expected to reach 12.58 billion litres and record the highest volume produced for 29 years. Uncertainty surrounding Brexit and the lack of detail regarding future trading relationships and tariffs was increasing risk throughout the supply chain.
Coronavirus reached the UK in late January and by March, the Government’s initial strategy of mitigation was changed to one of suppression, with the resulting lockdown having huge impact on key dairy markets. The loss of demand due to restrictions on travel, and closure of cafés, restaurants and food service sector adversely affected the average price for all milk, which fell by 6.5% in the period February to May. This trend was echoed across the EU and the US. UK cheddar cheeses prices were supported by a strong retail demand. The US saw a significant fall in cheddar price associated with the high reliance on the foodservice market, followed by a surge in price on reopening to restricted supplies due to government intervention and exports.
Taking into consideration the Coronavirus crisis, an updated FAO forecast has predicted global production to grow by 0.8%. The reduction in expected production estimates that US growth will reach 1.4% (previously forecast 1.8%) and EU growth will reach 0.4% (previously forecast 0.7%). Revised forecasts for GB milk production (AHDB) predict production to reach 12.44 billion litres for 2020/21 down 0.7% (83 million litres) on 2019/20 figures. Most of this loss has already occurred. Lockdown came into effect as the GB dairy industry was approaching peak production. Many processors requested that farmers implemented ways to curb production prior to the “spring flush”.
Globally, consumer demand for dairy products is expected to fall. As economies emerge from their respective lockdowns and begin to reopen, the “new normal” for many, will involve slower economic growth, heightened unemployment, lower disposable income, and a loss in consumer confidence. How quickly the UK economy can recover from the impact of the Coronavirus pandemic is yet to be seen. The resumption of the food service sector will have an important role to play in shaping demand going forward. How quickly confidence returns for eating out and frequenting coffee shops albeit, with a smaller choice due to closures combined with fewer numbers allowed in due to social distancing, will have the greatest impact on demands for products such as cheese.
AHDB have modelled three different scenarios to estimate how the route out of lockdown will impact the demand for dairy in retail, restaurants, takeaways and in public sector catering.
Scenario A – Bounceback: assumes that lockdown restrictions are lifted, and the reopening of foodservice markets follows. The heightened retail and delivery demand remain. The “normal” foodservice/retail balance is achieved by the end of 2021.
Scenario B – Stronger Headwinds: Follows the same assumptions as Scenario A but, with restrictions in place for longer (3-6 months) and a resultant harder hit economy.
Scenario C – Prolonged Restrictions: The “worst-case scenario” assumes lockdown is extended to the end of 2021. The food service sector remains closed for the rest of 2020 apart from takeaways. GDP for 2020 drops by 30% and unemployment rises to 21%.
Under all the scenarios modelled, GB milk production was higher than the domestic demand. Predicted net loss in demand over the 18-month period to December 2021 ranges from 600,000 litres per day (Scenario A) to 2.6 million litres per day (Scenario C).
Lockdown has had a huge effect on GB dairy consumption. Retail milk sales have reported a halt to the period of decline prior to lockdown. With 65% of milk use within the home being through the consumption of hot drinks, a rise in milk sales at retail to allow most of the population to continue to consume their preferred cuppa, was inevitable. A rise in home baking saw demand for butter increase by 29%. An increase in cooking meals from scratch has helped cheese sales and this trend is expected to continue to grow in popularity.
With the majority of the Country’s workers “confined to barracks”, 170 million lunches, usually eaten at work were being prepared in the home. Demand for sandwiches drove growth in butter and cheese and this combined with many pizza chains continuing to offer home delivery, has helped to insulate cheese from the losses that it has endured due to the reliance on the foodservice sector. Yogurt volumes have lagged behind growth in the total food and drink market (Kantar). With more time for breakfast, lockdown Britain turned its back on the humble yogurt in favour of hot options such as a full English. AHDB predicts yogurt volumes to remain flat (Scenarios A and B), or to decline (Scenario C) if prolonged restrictions prevent the reopening of schools and public sector catering.
Whereas, at the beginning of the year the outlook for dairy looked relatively strong and stable the effects of the Global Pandemic have destroyed the demand from the food service sector. With widespread recessions forecast, consumer demand has weakened. There is expected to be downward pressure on milk price until the end of the second quarter of 2021.
Coronavirus has shown that our current supply chains lack flexibility and resilience. John Allen explored the options available within the supply chain to respond post Covid-19.
Retailers appear, on the surface to be obvious winners in the Coronavirus crisis with, public demand growing, and this demand being fulfilled. The biggest winners were retailers with an internet-based service as use of this type of service has seen a rise of 20-25% throughout lockdown. Retailers without this offering have not performed as well. The challenge for retailers going forward will be to maintain any growth in market share that lockdown has initiated and to adapt the business model sufficiently to see off the impending threat of Amazon.
Processors are facing huge challenges to supply more from less without making any more profit. Processors have a typical return on investment of 1.4% which leaves very little room for finding savings, although growth has historically come from increases in productivity.
Farmers do have an opportunity to grow with standard exit rates from the industry of 3% expected to rise to 5% over the next few years leaving opportunities for growth of 5-6% for farmers embracing innovation and adopting new technologies. The supply trade to the farmers is expected to experience continued growth of 5-10% through mergers and acquisitions.
Alongside the increased economic pressure there are increasing levels of social pressure being applied to the industry to address issues related to the environment, health, diversity and animal welfare.
In line with Darwin’s theory on the inability of the dinosaurs to evolve fast enough to their “new normal”, the speed of business adaption to our “new normal” will determine the likelihood of survival or extinction.
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