Dairy industry suffers throughout the supply chain

This is the latest update from Santander’s Food & Drink team on how the coronavirus pandemic is affecting our clients and the sector as a whole.

While the impact of the coronavirus pandemic is being felt very differently in each food & drink sub-sector, the dairy industry is facing an especially challenging time. In particular, in a highly price-sensitive sector, both mid-market processors and dairy farmers are increasingly suffering.

The former group, already operating on wafer-thin margins, are being disproportionately impacted by the near complete closure of the food-service industry. While food service accounts for only 8 million litres a week of milk production – compared to 102 million litres produced for retail sale – food service and hospitality account for as much as 40% of some processors’ revenues; these sales have almost collapsed.

Much of the milk originally destined for food-service buyers is instead being sold on the spot market, where prices have fallen to 20p per litre in recent days. Similarly, large cheese and cream manufacturers previously supplying food-service clients have been forced to lower their prices, which are now down to 25p-26p per litre.

Such prices are not sustainable. The NFU says the average cost of milk production is 28p per litre, underlining the scale of the problems that producers now face. Demand will eventually return to more normal levels, but in the meantime, it’s crucial that the dairy industry supply chain is protected.

However, it’s worth noting that some opportunities are emerging amid the pandemic. As milk sold in high volumes during the first few weeks of the crisis – as shoppers increased their purchasing – some manufacturers opted to concentrate on a limited number of popular products, reducing their ranges of stock keeping units (SKUs). This has enabled some suppliers to the retail sector to increase prices.

Support for food and drink exporters

The Food & Drink Federation continues to do vital work with the government to make sure as much support as possible is available to the industry. One positive announcement in recent days came from UK Export Finance, confirming that its facilities are available to businesses hit by coronavirus related issues. These include:

  • The Export Working Capital Scheme, which can help with guarantees for bank loans to ease cash flow problems where businesses are facing disruption because of late payments;
  • Export insurance for businesses concerned they may not get paid; such policies help exporters recover the costs of fulfilling orders;
  • The Direct Lending Facility Scheme, which helps overseas buyers access finance to continue trading with UK suppliers;
  • Specialist support for exporters to China, with £4bn of capacity, as well as capacity in other markets affected by the coronavirus pandemic.

Additional highlights in food & drink:

  • Demand for UHT milk is soaring as shoppers stock up on longer-life products.
  • Sales of low- and no-alcohol drinks are also up significantly, by almost a third in 2019.
  • Challenger brands and start-ups are under pressure as supermarkets reduce their ranges and focus on staple brands, amid space constraints and limited customer numbers.
  • Free-range egg producers are concerned cash-strapped shoppers may switch to lower-quality products in a post-coronavirus recession.

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