Comment on the end of the EU dairy quota

Following the end of the EU dairy quota on 31 March, Will Hayllar, partner at OC&C Strategy Consultants has made the following comment:

“The overall UK food and drink producer base is under pressure in the UK. Our study of the top 150 food and soft drink producers shows that average operating profit margins in the industry are near to a historic low point at 5.2% after suffering through the recession. The ongoing supermarket price war triggered by the discounters has been putting even more pressure on this,’ says Hayllar.

He continues: “Within that, the dairy sector is a particularly difficult part of the UK’s food production base – and with the EU’s dairy quota system coming to an end today, difficulties are set to worsen. The challenge for the industry is that basic dairy products are currently considered a commodity, so all consumers are really looking for is low prices. As a result, supermarkets use milk as a key price fighting product, reducing prices to drive footfall into their stores and demonstrate their value for money credentials. This puts pressure on margins throughout the value chain. The large dairy producers make much lower margins than the overall food industry average (many are between 0 and 2% operating profit margins vs 5.2% for overall food producers) and several are loss making. Very thin margins for producers means they have to pass price pressure on to dairy farmers. With the quota system coming to an end, many farmers may opt to produce more milk to make up for losses in revenue. Milk flooding in from across the EU would cause prices to plummet even further and exacerbate the problems of an already volatile market.

“Specific factors in the global dairy market have added to price pressure this year – prices have fallen as sanctions with Russia have reduced demand for dairy products there, and strong global production has caught up with demand growth from China that had been driving global prices higher in previous years.

“The best way to minimise the pressure of these global commodity cycles is to make the products more differentiated so people choose to buy them for reasons other than price. One of the few dairy players making better than average profit margins in the UK are Muller, with a heavily branded range of dairy yoghurts and desserts. The French market also shows some interesting examples where liquid milk products have become less commoditised through development of different functional niches such as vitamin and nutrient-enriched milk.

Rebalancing of supply and demand will make the position for dairy producers and farmers better at some point in the cycle, but the only way to avoid/reduce the impact of similar cyclical pressures in the future is to add more value to the products and persuade shoppers that they are worth paying a little more for.”