Kite Consulting report concerned by risk of UK dairy instability
The report concludes that current lack of returns means the liquid sector cannot invest, driving uncertainty throughout the supply chain. The report suggests that the sector requires cost increases of at least £0.02 per liter ($0.03) to invest in maintaining sustainable capacity.
The report identifies that the liquid market is over-supplied, and in a precarious financial position due to pressure on margins.
It notes that industry is entering a new phase with growing demands on food safety, shelf life, environmental performance, welfare and traceability, meaning only well-invested processing businesses can meet requirements.
It also states that there is over-supply in the processing sector in a market, which is declining 1.5% per annum, and this has driven marginal pricing, putting pressure on returns.
Shortage of funds for re-investment is likely to drive more rapid decline in factory capacity, presenting a challenge for dairy farmers.
The sector needs resources to ‘protect and promote’ dairy against an increasing challenge from environmentalists and the vegan movement, through brand development and consumer engagement, the report notes.
The report highlights other challenges, including increased environmental regulations and consumer expectations over carbon, water use, plastics, recycling, traffic, anti-social noise around factories and other issues, as well as higher expectations and standards over food production standards and food safety / shelf life.
It also says two UK factories in London will be affected after 2021 by the expanded Ultra Low Emission Zones in London, and that there are concerns over labor availability post-Brexit for factory workers and drivers.
The report also notes that, as a part of its Project Darwin cost saving project, Müller is consulting on the potential closure of its Foston in Derbyshire, taking the amount of liquid milk processing capacity that has closed over the last few months alone in the UK to an estimated 600m liters.
The biggest opportunity to re-balance and improve margins throughout the chain is the removal of over-capacity to match capacity to demand.
If margins don’t improve, the report says there is a risk of polarization of processing facilities – with best sites being near or at capacity serving retailers, and other sites falling behind, risking further instability in the sector.
Re-balancing the market
John Allen, managing partner of Kite Consulting, said, “At Kite, we believe that the long-term prosperity of the UK dairy sector requires businesses at all stages of the supply chain to achieve sustainable returns – something we support by providing well-informed and proactive consultancy.
“We are concerned that the lack of returns throughout the liquid sector means that we risk further instability. Furthermore, it means that we risk entering a vicious cycle of a market in decline, under pressure from non-dairy alternatives, with insufficient funds to ‘protect and promote’ itself.”
Allen said the developments currently occurring to remove production capacity should re-balance the market and result in better true pricing throughout, restoring realistic margins.
“Yet there will be winners and losers given the obvious challenges ahead, and it is important that all businesses, from farmers to retailers, identify if their processing partner can thrive going forward. Now is the time to align with those who will end up the winners.”
