Written evidence submitted by Dairy UK (FS0018)


                                                                                                  September 2022

 

DAIRY UK SUBMISSION TO EFRA COMMITTEE INQUIRY ON FOOD SECURITY

 

Introduction

 

  1. Dairy UK is the trade association that represents the dairy processing sector of the United Kingdom. The dairy sector is a major contributor to UK food security. Many aspects of Government policy directly impact on the sustainability of the dairy sector.

 

General

 

  1. The UK dairy sector makes a major contribution to UK food security. The UK dairy sector has the potential to provide 11% of the UK’s calorie intake.

 

  1. Milk and dairy products are highly nutritious foods for which there are few adequate substitutes. Milk and dairy foods are nutrient-rich, contain a unique array of protein, vitamins and minerals, and contribute significantly to the nutritional intakes of the UK diet at all ages and stages of life.

 

  1. The Family Food report (2022) suggests British consumers currently buy about 194ml of milk or milky drinks, 28g of yogurt and 18g of cheese, per person per day. Milk provides high quality protein, and is high in calcium, iodine, vitamins B12 and B2 - and is a source of phosphorus, vitamin B5 and potassium. The dairy food group also contributes significantly to vitamin A and zinc intakes across all age groups, and to vitamin D, magnesium, folate, and selenium intakes in young children.

 

  1. Milk and dairy products are affordable. The efficiency of the sector means that it provides value for money products that are accessible to all households. This compares with those products purporting to be substitutes for dairy that are generally much more expensive.

 

  1. Dairy farming in the UK is predominantly grassed based which enables the utilisation of agricultural land that would not be suitable for producing arable crops.

 

  1. The UK dairy sector is a market driven industry that is internationally competitive. The UK dairy sector has effectively been operating at world market prices from 2007 following the EU’s abolition of export refunds. This meant that the EU dairy sector (of which the UK was a part through the EU single market for agricultural produce), by virtue of its dependency on exports to the world market, was compelled to be price competitive with other major milk producing regions around the world.

 

  1. As a result of the evolution of the EU’s Common Agricultural Policy and then Brexit, the UK dairy sector operates with declining levels of public support. Direct income support payments are being phased out in England. The Devolved Administrations are still refining their post-CAP agricultural policies, but these will eventually include much lower levels of direct financial support.

 

  1. Payment for the provision of public goods, through schemes such as Defra’s Sustainable Farming Incentive, will cover the cost of participation for farmers, but they are not intended to subsidise farmers’ main agricultural enterprise.

 

  1. Dairy farmers will have access to a variety of schemes to support investment in technology, (such as Defra’s Farming Equipment and Technology Fund for England), but the funds available are relatively small and they are open to other sectors.

 

  1. The international competitive pressure on the UK dairy sector is expected to increase. The import tariffs operated by the EU have largely been replicated by the UK. However, the Government is committed to trade liberalisation and has signed Free Trade Agreements with Australia and New Zealand which will grant those countries tariff free access to the UK dairy market after a relatively brief transition period. As both these countries have large exportable surpluses of dairy product and lower production costs, then these agreements will give them both the opportunity to obtain a significant share of the UK dairy market, should they wish to do so.

 

  1. In this context it is important that the Government should seek to maintain the international competitiveness of the UK dairy sector. This is especially the case when Government policy results in the imposition of additional operating costs that would not have arisen from the normal operation of the marketplace. In particular this should cover regulatory compliance costs and labour shortages resulting from Brexit.

 

Q1. What are the key factors affecting the resilience of food supply chains and causing disruption and rising food prices – including input costs, labour shortages and global events? What are the consequences for UK businesses and consumers?

 

  1. A definition of food system resilience can be the system's capacity to maintain a desired state of food security when exposed to stresses (medium term) and shocks (short term).

 

  1. Potential stresses and shocks to the dairy sector include:

 

    1. Instability in the price and availability of key inputs
       

As a result of Russia’s invasion of Ukraine, UK dairy farmers have been subject to major shocks in the price and availability of feed, fuel and fertiliser. This has pushed up operating costs to historically unique levels.

 

Table 1: Latest annual price trend data in key UK farm inputs

 

Concentrate Feed

+82%

Inorganic Fertiliser

+85% to 156%

Red Diesel

+65.5%

Source: AHDB

 

This has in part been compensated by significant increases in raw milk prices. In June 2022 prices were over 43% higher than compared to the same month last year. These price increases have not been sufficient to fully offset increased operating costs. Milk production is currently on a downward trend and is around 2% below last year.

 

Milk processors were also subject to sharp increases across the full spectrum of input costs, especially for energy.

 

Covid and Brexit has had a major impact on the availability of labour to the dairy sector, both at the farm and at the processing level. Prior to Brexit the sector had become heavily reliant on labour from the EU, particularly from Poland and the Baltic states. Covid saw many of these workers leave the UK and the exit from the EU has meant they have not been replenished. Covid also induced other major structural changes in the domestic labour market. This is putting severe strain on the viability of many dairy farms and is one of the major reasons cited by farmers for exiting the sector.

 

The shortage of HGV drivers also put pressure on the supply chain, both for raw milk collection and product distribution. The sector was able to avoid major disruption through a range of measures including 30%+ increases in wages.
 

    1. Animal disease outbreaks.

 

The industry operates to high levels of animal health and welfare and works collaboratively to address endemic diseases. Tackling new disease outbreaks requires the appropriate Government bodies such as the APHA to be properly resourced and to work closely with the industry. The recent suspect case of FMD shows that the threat is not hypothetical.

 

    1. Food safety scares

 

UK dairy products are safe. The industry works assiduously to ensure that they remain so. There are currently no SPS checks on products entering from the EU. The Government needs to ensure that its proposed Border Operating Model safeguards UK dairy food safety from all products imported into the UK regardless of origin.

 

    1. Weather events

 

Dairy farming and dairy farmers are generally resilient enough to deal with most extreme weather events, but the recent prolonged dry spell put further downward pressure on milk production over the summer.

 

 

    1. Disruption in final markets, either through price volatility, or unexpected changes in the trade environment such as trade embargos, new trade barriers, geopolitical events etc

 

Since 2007 the UK dairy sector has had to cope with price instability from its exposure to world market price volatility.

 

Solutions to price volatility provided by the finance sector have not proved viable. The potential for futures markets to mitigate price volatility have been exhaustively researched but their development remains disappointing. Price or income insurance is not available to dairy farmers.

 

The UK is vulnerable to trade policy shocks. By way of example:

 

-          The UK dairy sector along with other countries was expelled from the Russian market in 2014 which produced a downward price shock affecting the whole EU industry.

 

-          In 2019, because of the EU – US Airbus/Boeing dispute, the Trump administration imposed additional tariffs on UK cheese imports which were extremely prejudicial to UK Stilton manufacturers. Fortunately these have now been removed.

 

The biggest potential trade policy risk comes from the exposure of the UK dairy sector to the EU market. UK dairy exports to the EU equated to 17% of UK milk production in 2021. Maintaining a stable trading relationship with the EU is important to the sector. UK exporters also have to meet EU import administration costs, whilst the UK currently imposes no similar requirements on product coming from the EU.

 

    1. Policy and Regulatory Changes

 

Possibly the biggest source of stress to dairy sector food resilience is policy and regulatory changes by Government and the Devolved Administrations. The English dairy sector is absorbing the stress of changes to income support.

 

Possibly the greatest impending shock to the sector will be regulations governing pollution to water. The biggest immediate impact will be felt in Wales. Under the Control of Agricultural Pollution (Wales) Regulations 2021, the whole of Wales has been designated a Nitrate Vulnerable Zone. The derogation to permit a higher loading of nitrates on grassland of 250kg/ha will be removed from the beginning of 2023 and replaced with a lower limit of 170kg/h. According to AHDB estimates, to meet this restriction, farmers will have to reduce stocking densities by 17%, which would reduce Welsh milk production by an equivalent amount.

 

Dairy farmers in England may be faced with a similar challenge resulting from Defra’s Clean Air Strategy which will require a range of actions to reduce emissions from farming. The full implications of these measures have yet to be determined.

 

To cope with these regulatory impacts dairy farmers will need to invest heavily in slurry storage and handling equipment which will require significant capital expenditure. In the current market environment this may not be practical.

 

Whilst the sector fully acknowledges its environmental responsibilities, if the Government wishes to maintain the sector’s contribution to food security, then assistance should be forthcoming to help the sector to meet the cost implications arising from these regulations.
 

    1. Direct Action

 

Environmentally motivated direct-action groups are a threat to the livestock sector.

 

The campaigning organisation Animal Rebellion sought to disrupt the supply of dairy products to supermarkets in the first two weeks of September this year through direct action. Activity included criminal damage at several dairy processing sites. Whilst supplies to consumers were not affected, costs to the industry from additional security and repairing damaged equipment were not negligible. Such protest activity can be expected to recur. The sector will take appropriate precautions, but it needs the full support of the police and Government to ensure that the supply of food to consumers is not disrupted.

 

  1. The sector’s ability to absorb and recover from shocks and stresses depends on a variety of factors. It is clear from the above that the sector requires the support and collaboration of Government in several areas for it to respond successfully to external pressures. What the sector also needs is profitability; to give it the financial resources to respond to events, and the ability to attract external financial resources when necessary. This requires farmers and investors to have confidence in the future of the sector. Government plays an important role in providing that confidence by demonstrating its commitment to the prosperity of the sector.

 

Q2: What is the outlook for UK food price inflation in the short and medium term? What policy interventions should the Government consider to manage these pressures?

 

  1. Price pressures in the dairy sector can be expected to remain for as long as the price of feed, fertiliser and fuel remain high and in short supply. Global milk production trends are either weak or negative and generally not at a rate to meet the underlying growth in global demand. This will put continued pressure on dairy commodity markets which will drive up prices over the full spectrum of dairy products.

 

 

 

 

Table 2: Latest annual milk production trend data

 

EU

+0.5%

USA

+0.5%

Australia

-8.3%

New Zealand

-5.7%

              Source: AHDB

 

  1. The dairy sector is not responsible for setting retail prices, but it is inevitable and necessary for the sustainability of the supply chain that price pressures are communicated to consumers.
     
  2. The Governments initiative to cap the price of energy to businesses for six months is welcomed but it remains to be seen how energy markets will evolve in the second quarter of next year when Government support is scheduled to be removed.

 

  1. In the short-term the Government needs to focus activity on ensuring continuity of energy supply. The Government has not engaged in close dialogue with the food sector on how it will ensure prioritisation of energy supply should there be any disruption over the winter. Longer-term the Government must do more to ensure UK energy security.

 

  1. The Government should also seek to safeguard the continued production of inorganic fertiliser within the UK.
     

Q3: How are the rising cost of living and increasing food prices affecting access to healthy and nutritious food?

  1. Despite recent price increases the nutritional value of dairy products means they still present consumers with great value, especially compared to the costs of substitute products. Nevertheless, a large portion of the population are under growing financial stress that will affect food purchasing decisions.

 

Q4: How will the proposals in the Government’s food strategy policy paper affect:

 

  1. The Food Strategy consists of many distinct elements under three broad headings. Specific commitments of interest to the dairy sector and Dairy UK’s comments include:
     

Food security and sustainable production

    1. The greater recognition of the importance of food security should give greater confidence in the Government’s commitment to the sector.  However, the commitment to maintain domestic production at current levels is not sector specific. This issue might be addressed by the land use strategy (see below).
       
    2. Understanding and addressing barriers to the uptake of risk management and other farming insurance products might help the dairy sector to develop solutions to price and other risks.

 

    1. Developing plans to bolster resilience of critical inputs such as carbon dioxide (CO2) and fertiliser will be particularly important to the dairy sector.
       
    2. Government support for innovation in genetic technologies must be reinforced with an appropriate public communications campaign to reassure consumers of the efficacy and safety of these technologies.

 

    1. The proposed Institute for Agriculture and Horticulture needs to work closely with existing industry bodies such as the AHDB.

 

    1. The work of the independent review of labour shortages in the supply chain needs to be expedited to ensure any subsequent policy measures are not delayed. Greater emphasis should be given to practical educational qualifications that equip school leavers to pursue careers in the food sector.
       
    2. The proposed call for evidence on feed additives and methane emissions should help the dairy sector meet the challenge of reducing greenhouse gas emissions. However, any widespread adoption of this technology can only be contemplated after it has been demonstrated that they are fully compatible with animal health and welfare and food safety.

 

Healthier and sustainable eating

 

    1. In determining metrics for health, environmental sustainability and animal welfare, both for company reporting and food labelling, the proposed Food Data Transparency Partnership could have far-reaching impacts on the development of the sector.  It is important that the FDTP works closely with all sectors to prevent unintended consequences.

 

    1. Strengthening existing rules on Country of Origin labelling would be a positive development that would help to consolidate the UK dairy sector’s relationship with consumers.

 

    1. It will be some time before the randomised control trials of interventions in the food system can be used to inform long-term policy.

 

    1. It is important that the role of dairy is recognised in improving diets through the Community Eatwell programme.

 

    1. The recognition of the importance of schools in improving diets is welcome. The role of dairy needs to be integrated into initiatives in this area.

 

    1. The commitment to identify best practice in addressing food affordability and accessibility to healthy food should not detract from recognising the overarching importance of ensuring that the UK dairy sector remains competitive to enable it to continue to provide value for money nutritious safe food to all UK consumers.
       
    2. The review of public sector food and catering policy, including the Government Buying Standards for Food and Catering Services (GBSF), and the aspiration that 50% of expenditure should be on food produced locally, needs to recognise the geographic distribution of dairy farming and processing.
       
    3. Any ‘earned recognition’ scheme for farmers using environmentally sustainable practices needs to fully acknowledge the existing sector initiatives in this area.
       

The UK as part of a global food system

    1. The Government needs to take concrete steps to ensure that the proposed statement on its independent animal health and production regime will actively inform UK trade negotiations. It is important that no UK domestic policy initiative in standards or labelling disadvantages UK domestic product and that imported product is obliged to compete on an equal footing.

Q4: Is the current level and target of food self-sufficiency in England still appropriate?

 

  1. The food strategy only commits the Government to broadly maintain levels of production in England through productivity gain and new farming schemes. This commitment makes no explicit reference to dairy. The only sector specific commitment is to enable growth in horticulture and seafood.

 

  1. It is acknowledged that the UK cannot pursue complete self-sufficiency in food and that the UK will be reliant on trade to fulfil a major portion of its needs. Nevertheless, given growing geopolitical uncertainty, there would be clear advantages in seeking to reduce dependency on trade where this is practical.

 

Q5: How could the Government’s proposed land use strategy for England improve food security? What balance should be stuck between land use for food production and other goals – such as environmental benefit?

 

  1. If the land use strategy is to contribute to food security, then it must clarify the Government’s aspirations for the level of production to be seen from major agricultural sectors.

 

  1. In the broadest sense, Defra policy over the past decade has largely been orientated towards environmental objectives. The Government has not sought to set out what aspirations it may have for production from individual agricultural sectors. Output has been left as a residual to be determined by the interaction between market forces, the phasing out of income support, and the introduction of new schemes focused on the provision of public goods. This has created an uncertain investment environment for all sectors.

 

  1. The Government’s proposed land use strategy will have to address the question of production. It especially needs to resolve what aspirations the Government has for upland livestock farming. The implicit logic of Government policy is for it to be supplanted by afforestation. This ambiguity in Government policy needs to be eliminated to give agriculture a clear sense of direction.