Cheese makers feel the squeeze says new Kite report

Thursday, 21 September 2023

A new report published by Kite consulting claims that cheesemakers find themselves in a “perfect storm of weak demand caused by inflationary price increases at retail level; a high cheesemake on the back of strong milk volumes; and expensive stocks valuations resulting from record high milk prices”.

Previously the cheese sector has been in a relatively profitable position compared to the liquid milk sector. However, the report claims that the tables have now turned. The key challenges include very low commodity prices, especially problematic given the bulk of cheese on the market today will have been made when milk prices were soaring; higher interest rates pushing up the cost of working capital and a fiercely competitive retail environment meaning that retail buyers are frequently retendering. Our latest wholesale prices indicate that milk cheddar has now fallen to £3,300 p/t (29% less than a year ago). 

Kite's report on the UK cheese market argues that too much pressure on UK cheesemakers may leave many vulnerable to economic realities and could lead to significant shrinkage within the sector. This in turn would be damaging for the retailer’s own interests, leading to less consumer choice and less cheesemakers servicing UK retail demand. It also argues that many cheesemakers will be increasingly attracted to export markets, leaving less product available for the UK retail market.  In the latest quarter though, while butter and powders have seen export growth, cheese exports have remained fairly static with global demand remaining fairly weak. There is certainly scope for more growth here though and many canny cheesemakers are gearing up their operations to service the potentially more lucrative export market. There may be opportunities presenting from the CPTPP trade deal although that is potentially niche to begin with.

Currently, a third of UK milk is used in cheese making, so it is an important driver of the dairy sector. Retail demand for cheese has struggled in recent years due to the cost-of-living crisis and rising prices impacting consumer demand for all dairy products. The latest Nielsen retail sales data suggests that cheese volumes are down by 2.6% year-on-year (w/e 12 August). Category value losses had been experienced from a consumer shift away from branded product cheddar towards own label. There are signs of this pattern now beginning to shift with branded cheddar seeing 8% growth in the latest 12 week period. However, it is important to note that much of that volume growth has been promotionally driven with manufactures and retailers offering discounts to drive sales and keep brands ticking over. 

Arguments over who is extracting the most value from the supply chain have been raging in the media with accusations of retailer profiteering rife. Unfortunately, there are significant challenges right across the supply chain: from farm gate to consumer are currently all under pressure to greater or lesser extents.  It is clear that the immediate outlook for the cheese sector will be challenging until stronger demand returns. 

Image of staff member Susie Stannard

Susie Stannard

Lead Analyst (Dairy)

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