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This article is part of our collection on Agriculture
Chris Gooderham, head of market specialists (livestock) at the Agriculture and Horticulture Development Board (AHDB), looks at how the current dual challenges of coronavirus and Brexit could impact dairy markets over the coming months.
Last updated: 27 Oct 2020 5 min read
Let’s look back before we look ahead. 2019 was pretty stable; global supply growth was in line with demand growth, and prices fluctuated around long-term averages. However, the spring of 2020 brought the first wave of Covid-19 to the UK, and with it some significant challenges, particularly for those supplying food-service markets.
The sudden, total loss of this outlet meant that wholesale markets collapsed, farm prices reduced, A and B prices were reintroduced and some milk went uncollected.
Recent analysis by Old Mill accountants showed dairy farm profits recovered in 2020 as feed costs returned to more normal levels. Margins do remain tight for the majority, with average milk prices just about covering the average cost of production.
Source: AHDB, Promar International and partners
Quoting averages is always a dangerous approach, though, as farmers’ individual situations varying greatly depending on where and how they farm, and who they supply their milk to. Coronavirus has had a severe impact on individual businesses throughout the dairy supply chain. The processors and farmers who took the brunt of those losses will still be suffering the financial woes, and they will also be the ones looking ahead with the most trepidation.
Thankfully, wholesale markets did recover relatively quickly from that initial shock. They were more resilient than many feared, thanks to demand moving from out-of-home to in-home. The recovery in wholesale prices also flowed into farm-gate prices. The big drops in April and May were reversed for most as the year progressed.
The coronavirus impact brought concerns about stock build-up. We have looked at available supplies in the UK. That is a comparison of milk production plus imports, less exports. It gives us an idea of how much dairy is available and whether that is in line with consumption trends. What we’ve seen is that, for the period of January to July this year compared with last year, available supplies have dropped. Production of key products didn’t show any significant growth, but changes in our trade balance brought overall availability down.
The trade movement is an interesting result of the move of consumption from out-of-home to in-home. Retailers sell a higher proportion of UK-produced dairy than out-of-home sellers. So when demand switched to retail, this gave support to UK-produced product, but meant there was lower demand for imported products.
Overall, these changes helped keep the UK market relatively well balanced, and mitigated downward pressure on market prices from the loss of out-of-home demand.
On the milk production front, we’ve just had the second highest September production in 25 years. That is a remarkable turnaround from a spring where farmers were being asked to curb milk production; a time when we saw yields pulled back, cows dried off early and an increase in culling. It shows the resilience of the industry.
So what happens next? Not only do we have the disruption to markets arising from our exit from the EU, but we are also facing further uncertainties as a result of the pandemic. Let’s look at the pressures on global supply and demand.
Current forecasts show growth in global supplies of around 1%. Normally this level of growth is in line with expected growth in global demand. So, provided demand continues to grow, we are not expecting high milk volumes to push prices down.
In Great Britain, our latest forecast predicts small year-on-year increases in milk production for the remainder of the 2020/21 milk year. Nothing dramatic.
On the milk production front, we’ve just had the second highest September production in 25 years. That is a remarkable turnaround from a spring where farmers were being asked to curb production
The uncertainty remains on the demand side. The continued presence of coronavirus means how and when the hospitality industry returns to ‘normal’ trading conditions remains unknown. While retail demand and the rise in home cooking has offset most of this, at least for dairy, we estimate that there is still an overall net loss in demand of around 0.7m litres per day. We would expect trade flows to continue to reflect this lower food-service demand, though, helping to limit the impact on the domestic products.
We shouldn’t forget the Covid impact on the normal holiday boost to dairy demand if big family celebrations are not possible. That will affect products such as fresh cream and speciality cheeses such as Stilton.
As a result of Brexit, cost of trade is expected to increase, even if we do agree a deal with the EU. For dairy, we expect prices to rise overall, although there is likely to be some volatility in the first few months as the supply chains adapt to the new trading environment.
In summary, how dairy markets develop in the next year will be determined predominantly by how demand develops.
AHDB’s dairy market weekly publication will continue to keep you informed about the key factors influencing the market. Ensure you are on the subscription list by updating your details at ahdb.org.uk/keeping-in-touch.
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