Arla Foods Consolidated Annual Report 2021

38 Arla Foods Consolidated Annual Report 2021 / Performance Review / Market overview MARKET OVERVIEW Contents III Highly volatile macroeconomic environment As Covid-19 lockdowns were lifted in more and more countries and life returned to the 'new normal' during the first half of 2021, the global economy recovered fast from the steep decrease in 2020, keeping demand for dairy products high. However, new variants of Covid-19, labour and logistics challenges, weather-related issues along with other issues weighed on the global economic recovery and had a significant impact on the global dairy sector as well. GDP growth was 5.6 per cent globally, the strongest post-recession pace in 80 years. Despite this year's pickup, the level of global GDP in 2021 was 3.2 per cent below pre-pandemic projections, and per capita GDP in many emerging market and developing economies remained below pre-Covid-19 peaks. Global supply chains experienced several challenges during 2021, from energy and labour scarcity to problems with logistics. This, coupled with the increasing demand from the fast economic rebound, led to inflation quickly rising to very high levels in the second half of the year. Inflation, in turn, put further pressure on global supply chains as cost of production rose on all fronts, from energy and feed through ingredients and paper used for packaging, to fuel. While energy price increases hit the consumers in the second half of 2021, they have not felt the full effect of price increases on consumer goods much yet. Opposed to the volatile macro and commodity markets, foreign exchange levels were relatively stabile during 2021 with average rates strengthening 3.3 and 3.2 per cent for GBP and SEK respectively. USD average rate weakened by 3.7 per cent compared to 2020. Changing consumer behaviour driven by Covid-19 During 2021, consumer behaviour was still significantly influenced by Covid-19, although to a lesser extent than last year. Overall, demand for dairy increased slightly in our key markets. Along with the easing of Covid-19 restrictions, consumer trends normalised, which meant less in-home cooking and less stocking of groceries at home. This was accompanied by the slow revival of the foodservice sector as restaurants, cafes and canteens opened again, overall leading to re-balancing of demand between retail and foodservice. Online grocery shopping was largely accelerated by Covid-19 in the past two years. At the peak, 15 per cent of all grocery sales were online in certain European markets in 2021. Slightly declining milk supply and significantly rising commodity prices European milk production decreased slightly compared to the same period last year. Milk production generally decreased in big countries like Germany and France, and this was only partly offset by growth in small countries like Ireland. The supply flow was mostly stable, but high inflation in feed and energy prices as well as challenging weather conditions put pressure on milk production. European and global dairy commodity markets quickly recovered from a decline in 2020. Similarly to other commodities, dairy prices increased steadily throughout the year, with an acceleration towards the end of the year. Farmgate milk prices followed the increase across the globe with a lag of a few months, however high feed, energy and fuel prices challenged profitability. INFLATION IN ELECTRICITY AND NATURAL GAS PRICES (%) 600 500 400 300 200 100 O 2019 2020 2021 Natural Gas Electricity Source: Kairos Commodities; Arla Procurement *Source: OECD CHANNELS SHOPPED FOR GROCERIES (%) Aug. 19 Aug. 20 Aug. 21 EUROPEAN COMMODITY MARKET PRICES Milk utilisation price equivalents, EURc/Kg 50 96% 42% 91% 40 94% 53% 89% 30 94% 57% 88% 20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 20 40 60 80 100 2020 2021 Supers/hypers Online Convenience Source: IGD, Online shopper trends 2021 Cheddar Source: GDT WMP Gouda Mozzarella

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