The UK milk market is pivoting due to new investments, better paying markets elsewhere and growing concern over the long-term merits of retailer cost of production contracts. But a short-term window of opportunity has opened to reshape a future, stable relationship between retailers, processors and farmers, says a new Kite Consulting report.

The report Decoding Dairy Disruption - why UK retailers must rethink dairy procurement strategy now examines what has driven this year's anomaly of tight dairy global supply, a UK milk production surge – reaching record highs in the spring – while farmgate prices lag those on the continent.  

The report explores the impacts on the situation and the structural dynamics shaping the sector but also warns of some potential negative implications for farmers, processors and retailers across the UK dairy value chain, urging players within it to not be complacent. 

Milk volumes have been good this year, but this doesn't mean they always will be, and UK milk prices are consistently lower than the EU – by an average of 2.3p over 19 years compared to Denmark, for example. 

But a changing global investment emphasis may well change the UK's situation in the future. While retailers can rely on getting the milk they need, they can't rely on getting it at low cost. They should expect price increases above inflation, states the report. 

"At the heart of the issue lies a market in transition," said John Allen from Kite Consulting.  "We are seeing a shift that is reshaping power in the value chain. 

"For decades, the UK dairy sector has been focused on domestic retail, shaped by the logistics and pricing of liquid milk. But with processors like Arla and Müller investing heavily in export capabilities – mozzarella, powders, whey – UK milk is increasingly tied to global markets where premium-added products command higher returns," he said. 

"At the same time UK retailers are asking for higher standards than some global commodity markets. Sustainability, carbon metrics and animal welfare are now expected farm-level deliverables," he added. 

But in a seller's market, customers asking for more are required to pay more – consistently, and at a premium, says the report. Otherwise, local customers may be outcompeted by better-paying global clients, with fewer demands.

"What was once, mostly, a buyer's market is now becoming a seller's market, and this will only accelerate as new processing facilities come online," explained Kite Consulting's Becki Reay. 

"Farmers are beginning to question the value of traditional cost of production (COP) models, which cap upside in buoyant markets. With global prices often outperforming domestic benchmarks, producers are seeking more flexible, reward-driven pricing," she said. 

Becki believes the message for dairy farmers is clear: "Farmers need to look at the market signals and ask what their processor requires in terms of milk quality, welfare standards and, crucially, seasonality. 

"Efficiency needs to be the top priority across the supply chain. The absorption of capital inefficiencies, due to a mismatch of seasonal supply and demand, will be felt in the milk price," she said.

The UK dairy market is becoming more global, more competitive and more supplier led. The current surplus is temporary. 

"The shift in power, pricing dynamics and expectations is here to stay. Those who move fastest to adapt will be best positioned to thrive," continued Becki.

"Retailers have a short-term opportunity to guarantee security of supply of milk produced under their specific standards. Export opportunities and policy threats in the UK could put their supply at risk. That means revisiting pool contract terms, improving milk pricing structures and offering meaningful incentives for sustainability, biodiversity and supply consistency.

"Meanwhile, all UK milk processors need a strategy to secure future milk supplies and avoid being outcompeted for milk by ambitious peers. While milk has been plentiful this year it doesn't mean it is always going to be. There is no structural change or issue, and supply pressures remain," Becki concluded.

You can download a copy of the report from the Kite Consulting website or by clicking here.