Cheesemakers are seeing a 'perfect storm' of weak demand caused by inflation at retail level and expensive stocks valuations resulting from record high milk prices, a new report says.
The cheese sector has previously been in a relatively profitable position compared to the liquid milk sector, but the report, by Kite Consulting, claims that the tables have now turned.
Currently, a third of UK milk is used in cheese making, so it seen as an important driver of the dairy sector.
Key challenges highlighted in the dairy consultancy's report include low commodity prices, higher interest rates pushing up the cost of working capital and a fiercely competitive retail environment meaning that retail buyers are frequently retendering.
The latest wholesale prices by AHDB 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, the report says.
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.
Looking at the report, Susie Stannard, AHDB lead analyst, said: "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."
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.
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.