With Irish milk output up 7% for the first six months of 2021 and global markets for dairy commodities robust, one might expect that Irish dairy exports would show positive year-on year gains.
Recently published CSO figures show that Irish dairy exports have declined in value by €265m or 19% in volume, for the first six months of the year (January to June).
However, it’s important to contextualise this global export value, especially given the past 18 months.
Last year was by anyone’s reckoning an “anomaly” year and, not to be outdone, 2021 has offered up some major challenges for the Irish dairy industry.
This year, factors outside of supply and demand fundamentals continue to have significant impact on exports.
Robust and resilient
As such, the performance of Irish dairy for the year to date should be considered robust and resilient in the face of challenging headwinds.
So far this year, and in spite of the multifaceted challenges throughout the entire supply chain, particularly the elevated costs associated with freight, Irish processors and exporters have delivered higher farmgate milk prices than 2020.
Stocks and volume
The first half of 2020 saw a staggering 850,000mt of product move off the island, with initial export momentum borne off a strong end to 2019, with forward sales crystallising into quarter one and two of 2020. Then came COVID-19.
Contrary to the initial downward price pressures as a direct consequence of the pandemic in March and April last year, retail demand for butter in particular rose sharply as lockdowns were imposed around the world and panic buying altered the traditional supply-demand dynamic.
These factors led to record exports of dairy, despite the effective cessation of global food service, a vital channel for Irish dairy goods.
The first six months of 2020 recorded 12% growth on 2019 (which itself was a very strong year for exports) and over 100,000t above the average for the same period in the previous three years. Demand for dairy in 2020 was sustained as buyers moved away from the traditional “just in time” to “just in case” buying behaviour. In short, this was driven by fear of consumer demand not being met.
Logistics and supply chain
Logistical difficulties were well documented throughout 2020 but 2021 has proved equally if not more challenging.
The procurement and cost of equipment has posed a massive challenge for our dairy exporters, in many cases narrowing the gap between cost of sale and margin.
Throughout the dairy supply chain, from farm level to supermarket checkouts, costs have increased. Oil, plastics, wood and most notably freight costs have risen exponentially this year, giving rise to what some have termed a logistical crisis.
Some Irish dairy exporters have reported a two-fold or more increase in freight charges over the past 12 months, with increases in shipping costs to the Far and Middle East, both strategic regions for Irish dairy exports, particularly pronounced.
This is heightening the need to plan customer demand and shipping dates with precision in order to secure containers and ensure delivery of goods on time.
The largest freight forwarder in the world, Maersk, recently announced a record profit, citing a container boom as consumers and businesses alike order goods in mass quantities.
Global commodity dairy prices have performed strongly in 2021 across the key Irish export categories of butter, cheese and powders.
One notable area that is challenging Irish export value is the decline in demand in Asia for specialised infant nutrition. This product category declined in Irish value exports by €118m in 2021 versus 2020, reflecting reportedly lower birth rates in China and a move by consumers to an increasing preference for locally produced brands.
Indeed, total global Chinese infant formula imports are down 21% from 171,000t to 134,000t for the first half of the year.
It remains to be seen what impact the Chinese government policy to encourage families of up to three children will have on future demand for this product.
When you strip out this infant formula business, Asia is performing very well, with demand for the basket of Irish dairy products up 17% in volume versus 2020. Indeed, butter, is starting to gain traction in these markets and, in particular, China and Japan.
China is importing record levels of whole milk powder this year, up 35% year on year, and Ireland is benefiting from this demand, with January to June exports up from 152mt to over 2,000mt.
From a UK perspective, there is increasing volume of exports through Northern Ireland, up over €35m, partially countering the decline in exports to Britain of €74m.
On a positive note, there were indications in June of a return to normal trade, with the highest value exports to the UK from Ireland for that month in five years. Indications are that this may have been driven by supply chain fill, particularly in food service, as COVID-19 restrictions were removed and pubs and restaurants were busy during the European football championships.
European milk output is up approximately 0.5% for the first six months. There was positive trade on butter into the key markets of Germany and France, up 9% and 12% respectively. Ongoing COVID-19 uncertainty across Europe during the first half of the year with partial restrictions re-introduced and challenges across food service have affected consumption. There is hope that with vaccination levels increasing and tourism returning, the second half of the year will offer some upside.
Dairy exports to Africa are in line with the same six months last year at €331m. This follows a 15% rise in the value of dairy exports to the region between 2019 and 2020. Demand in the region, and in particular west Africa, tends to correlate positively with oil price. The price of a barrel of crude oil dropped from c.$70 in the first six months of 2020 to end the period at $44/barrel. Almost exactly the opposite has happened in 2021, with the year starting at $45/barrel but rising to $71/barrel by the end of June. Nigeria and Ivory Coast best demonstrate this, with exports up by €20m combined, driven by demand for enriched powders.
Cheese has been performing strongly, with growth of 14% to €48.3m or 14,000t – largely to north African markets. Algeria represents the bulk of this growth, with exports of almost 7,000t (valued at €23.8m) from January to June, up 21% in volume. Cheese exports to Egypt have grown by 32% in value and volume to 3,783t, valued at €12.7m. Both countries were the focus of a ministerial-led trade mission pre-pandemic in 2020 and a follow-up virtual trade mission in April of this year.
The momentum for Irish dairy exports into the US continues apace, with exports up 2% in value and over 7% in volume on what was a record versus what was a record six months in 2020. Although trade of butter has softened slightly, there has been an uplift in Irish cheese exports and the market accounted for €231m. US Government food box, subsidies, in response to the COVID-19 crisis, have helped underpin domestic consumption there. A further positive note in US-Irish trade has been the removal last March of a 25% tariff related to a dispute between the EU and US aircraft industry.
On 14 September, Bord Bia is hosting a virtual seminar for Irish exporters interested in targeting the West African market.
The event will provide an overall understanding of the market and its opportunities, with individual-specific sessions on dairy, drinks and seafood.
West Africa, consisting of 16 countries, has a total population of 320m and is an important market for Irish dairy, which is the leading suppliers of dairy powders to the region.
It is also a key market for Irish seafood and spirits.
From an exporter’s perspective, the region has its challenges due to geopolitical instability and dominance of the informal economy.
However, a growing population, increased urbanisation and economic growth offer a range of business opportunities for Irish exporters.
Virtual dairy trade mission
Over three dates in October and November, Bord Bia will host the second virtual dairy trade mission to southeast Asia, targeting 250 dairy buyers in Vietnam, Malaysia, and Thailand.
The trade mission will consist of a series of up to 300 business to business meetings between Irish dairy exporters and southeast Asian customers.