UK Dairy Inflation: Consumers and Retailers Pressured by Increasing Prices

While consuming dairy commodity products may be pleasantly palatable, buying them at the present time is not - It is rather accompanied with a sharp contortion of the face. Prices at the retail level have gone up, while retailers are also dealing with multiple cost price increase requests from suppliers.

The crux of the matter is, in almost every market, dairy commodity prices have seen inflation. The EEX European liquid milk index has risen 13% so far in the first half of the year, and one may argue the increase may be attributed to seasonality. However, the knowledge of the YoY change would clear any doubt of inflation in the dairy commodity markets. The European liquid milk index as of the 13th of June was at 48.80, up 35% YoY from 12 January 2021.

Production trends and feedstock milk prices are often a decisive determinant of product derivatives. Since milk has seen price inflation, its offshoots have also seen similar price action. For example, the EEX butter at €7418/mt at the end of June has gone up 81% YoY. In the UK, the price hike in dairy commodities is even worse, and the AHDB unsalted butter average price rose 81% YoY while average bulk cream price led the pack with a 91% YoY increase. Both SMP and Cheddar also more than doubled, selling 57% and 59% up YoY, respectively, at the end of June.

Besides the prices of milk and dairy, the cost of labour and packaging have also seen inflation adding to the input cost. They have all come together to push the milk prices and other dairy commodity items up. To prevent the higher cost from moving directly to the higher-value export market, the cost inflation has been passed indirectly to consumers.

The bulls have thus migrated to, and have  been felt across the food supply chains for both consumers and retailers. Reports from certain quarters hint changes in consumer behavior due to food inflation, while others are going for smaller amounts of dairy products or discounted items. This is somehow confirmed by the Latest Kantar results which reports a rush to German discounters. According to this report, nearly 70% of UK consumers shopped at Lidl and Aldi in the last quarter.

From the retailer side, retailers continue to experience increases in their operating costs. This point is accentuated by Tridge’s Buyer Distribution Manager based in the UK, Ana Altimari. According to Ana, retailers in the UK have seen a dramatic cost price increase over the year, with some already receiving about 4 rounds of cost price increase requests. She adds, “this is causing a trading dilemma which is now more accentuated than ever before, that is, keeping an unprofitable category that is a customer favorite”.

The price inflation is squeezing out the paltry profit margins that retailers make on dairy products. Some retailers are thus finding innovative ways to decrease their costs to remain profitable. Market insiders mention retailers introducing niche variations that go to take care of the less price sensitive customers.