COVID-19 Dairy Impact Analysis
24 Jun 2020
The Covid-19 Impact on Dairy
Covid-19 has already had global effects, with significant economic implications across all regions. The dairy industry has already seen negative impacts, essentially due to the unprecedented global halt to foodservice and consumers downtrading away from added value.
But along with pharmacy and some hi-tech, dairy will certainly be more sheltered from the global downturn than most sectors.
As we saw in 2009/10, it can take some time for consumers to return to more expensive added value and convenience products.
GIRA predicts that dairy consumption in the EU and the US will fall sharply in 2Q20 hit by the first wave of Covid-19 induced restrictions, with subsequent declines increasingly driven by the ensuing economic fallout.
However, unlike the long 2008 economic crash, a faster rebound in demand is expected, with China in particular helping.
Both the EU and US will be hard hit, but the stronger than anticipated lift in retail sales has helped temper the supply and demand imbalance.
Responses at a farm level have varied between markets, with efforts made in the US to reduce the volume of milk entering the formal channels and therefore temper the extent of the supply and demand imbalance. However, the greater foodservice exposure here will be an issue, particularly for cheese.
The tipping of US milk has not been mirrored in the EU, and as such, supply and demand is expected to be more imbalanced.
Government Response Impact
Major government efforts underway may provide some short-term support to the industry.
However, the inevitable market imbalances will result in the development of stocks, particularly for cheese in the EU and cheese and SMP in the US; SMP intervention stocks could develop in the EU, and India is also accumulating significant SMP stocks.
As we have seen not so long ago with SMP in the EU, any large public stock overhang will have negative price implications for some time into the future, and not just in the EU.
In both the EU and the US, policies to temper the impact of Covid-19 on dairy look to take product out of the supply chain.
But they diverge when it comes to how this is to be done; EU policy will result in public and probably also private stock accumulation, whilst US policy will initially divert product to other sales channels such as food banks.
US policy could result in greater short-term market stress but could result in a more rapid recovery. While EU policy may limit the immediate downside, it could well result in a prolonged period of suppressed dairy prices.
All dairy commodity prices are expected to trend down through 2020, with the largest drop expected in 2/3Q20.
James Caffyn | GIRA
The strong retail lift and disproportionate food expenditure are likely to impact the depth of the price decline.
The major question remains whether this can be maintained as lockdown eases, government income support perhaps wanes, and expenditure patterns return to normal to the detriment of food and drink.
Whilst China currently represents the only bright spot, the scale of its imports will not be sufficient to support the industry. The short-term price lifts in the EU; US markets are likely to be short-lived, with many of the limited fundamentals supporting these likely to dissipate and with this, much of the positive market sentiment.
It is likely the volume loss for markets will be less extreme than initially envisaged, but from a value perspective, this will be a tough 12-18 months for the dairy industry globally.
Corporate Evolution & Opportunities
Those with stronger balance sheets will be best positioned to weather the storm and take advantage of the considerable opportunities for expansion and market share gains that will likely ensue when the recovery comes.
The best-equipped companies will look to rapidly adjust their strategies to fit with the “new normal” dairy world post-COVID-19. Several already underlying trends are likely to be accelerated by Covid-19.
Sustainability has been gaining traction for years already; assuming consumer spending power is not too badly hit, it is plausible to imagine a post-COVID world where sustainability will have an even greater impact on consumer purchasing. Increased supply chain scrutiny is likely to take place.
It will be key for dairies to capitalise on sales channel shifts, with more lean, flexible and agile corporate structures required to take advantage of these opportunities.
In the wake of Covid-19, health and food-as-medicine could take off again; the importance of science in consumer choice will likely further increase, with major implications for both products and production methods. This could also act to accelerate the advance of dairy alternatives.
Most dairy processor margins will be highly pressured in the coming months. Any unjustifiably high corporate valuations will fall sharply, and for some, opportunities will develop to expand by acquisition into new product categories, growing brand portfolios and entering new geographies.
Senior Consultant, GIRA
James Caffyn is a Senior Consultant with Gira responsible for managing a wide range of strategy and due diligence projects throughout the value chain in emerging and developed markets. Whilst working in a range of food and drink industries, he specialises in the animal protein and dairy sectors and has managed projects for leading global companies, with a focus on growth, market entrance & investment strategy.