Dairy UK (ABR0035)

Preamble

Dairy UK is the trade association for the UK dairy supply chain, bringing together dairy processors and famer co-operatives, manufacturers, farmers and bottle milk buyers throughout the UK. Between them, Dairy UK members collect and process about 85% of the UK’s milk production.

Whether our members’ businesses are focused on exports or on the domestic market, they require an operating environment which allows them to thrive. Exiting the European Union is bound to have a profound impact on the dairy sector and the industry must ensure it takes all the right steps to become more resilient, competitive and profitable.

Following lengthy discussions with members and dairy stakeholders, Dairy UK set out five Brexit principles, essential for the sustainable competitiveness of the industry.

• Continued market access without tariff or non-tariff barriers;
• A clear relationship with the EU prior to the negotiations of FTAs with third countries;
• Access to skilled and unskilled labour from the EU;
• Fair food and drink regulations on par with EU partners, allowing a level playing field and avoiding the creation of non-tariff barriers;
• Measures to prevent any disadvantages for UK dairy farmers compared to their European neighbours.

The UK dairy sector is a major asset to the UK.

Dairy makes a difference to the economy – The sector accounts for 15% of the value of agricultural produce at farm level, and £8.8bn of sales at wholesale.

Dairy makes a difference to people – The sector provides employment at farm and processor level for 76,000 whilst also providing a range of safe, nutritious and value for money foods that are consumed in 98% of UK households.

Dairy makes a difference to the environment – Dairy farmers are responsible for the management of around 8% of UK land area.

The sector is optimistic about its future. In the current structure of global and European markets, the UK dairy sector is competitive and has considerable potential for growth as global demand for dairy products steadily increases due to rising world population and incomes. This will provide the sector with further opportunities for export in addition to seeking growth through import substitution.

Given the major role EU agricultural policy has played in the development of the sector, the future of UK agricultural policy post-Brexit is of critical importance.

It is essential that the dairy sector and Government should keep engaging actively on policy issues in order to address:

Food Security

Agricultural policy should seek to contribute to UK food security by sustainably maintaining and increasing food production as the UK should not seek to rely on trade to meets its needs in an increasingly uncertain geopolitical environment. Increasing UK production would also contribute to global food security.

Sustainability

Dairy has an important impact on all three aspects of UK sustainability i.e. economic, social and environmental sustainability.

Dairy Trade

The UK is not self-sufficient in dairy products. The UK produces around 14.8 billion litres of raw milk. An equivalent of 18% is exported outside the UK in various forms, with roughly 80% going to the EU and the rest to outside the EU. The UK imports the equivalent of around 33% of raw milk volume, mostly in the form of cheese.

Abandoning the status quo would have a significant impact on dairy trade, especially in terms on trade with EU countries as any type of tariffs or non-tariff barrier would hinder the UK’s competitiveness. Therefore, the dairy industry strongly supports the continuation of existing trade arrangements as any divergence from the current systems would be highly disruptive.

Benefits of the current system

Uninterrupted access to the EU market

With 80% of dairy exports going to EU countries, mostly in the form of cheese, butter, cream and milk powders, continued access to the EU market is essential for UK dairy companies. This means continued access under the current system without any tariff and non-tariff barriers to ensure the dairy industry can thrive and grow.

Source: AHDB Dairy

A significant number of UK dairy companies either have operations throughout the EU or trade regularly with the EU. Losing an unfettered access to the EU market would create a significant amount of issues, both for companies’ business strategies and exports operations. This could also jeopardise the UK’s image as a trusted and competitive partner for inward investment.

The dairy industry needs the Government to maintain continuity and avoid any disruptions to existing trade partnerships between the UK and EU countries.

Existing trading relationships

The industry has been working hard to develop dairy exports and unlock new opportunities with countries around the world. Dairy companies already have successful partnerships in place in countries including the United States, Australia, China, Singapore and the United Arab Emirates.

Therefore, it is extremely important that mutual recognition of production and sanitary standards should be maintained, as well as Britain’s share of tariff-rate quotas currently in place. Losing these recognitions could lead to the creation of non-tariff barriers and jeopardising our competitiveness in the global market.

For example, the UK and the United States have an official understanding for organic production standards. Losing this recognition would have a significant negative impact on dairy companies exporting organic products to the United States as their production standards would no longer be recognised as being equivalent to US standards.

To remain competitive, the UK dairy industry needs a level playing field with its European and global partners. When looking at food and drink regulations, the Government must make sure it does not inadvertently create non-tariff barriers which would hinder dairy companies’ ability to export.

Where UK dairy exports are subject to trade barriers, the industry cannot be competitive and reach its full potential. Removing non-tariff barriers such as environmental regulations, labelling, food safety and sanitary regulations can help boost exports of dairy products.

Impact of a WTO schedule

Dairy UK’s initial analysis of the impact of an agreement with the EU based on the EU’s WTO tariff schedule on the dairy sector at both national and regional level is that it would:

• Permanently suppress UK demand for dairy products to the benefit of substitute products;
• Severely reduce UK dairy exports;
• Create a growth opportunity for other milk producing countries.

The tariffs for dairy products in the EU’s WTO MFN tariff schedule are prohibitively high. They are designed to prevent the import of dairy products into the EU.

Imposition of the WTO schedule by the UK would make EU imports into the UK much more expensive. For instance, the price of cheddar from Ireland could rise from its average price over the past three years of around £2,600 per tonne to round £4,000 per tonne. The price of imported product would therefore rise dramatically. Demand for EU imports would fall whilst prices for domestic product would rise to a new market clearing equilibrium. Rising prices in the UK market would affect UK demand for dairy products. Consumers could reduce their consumption of dairy and seek out substitutes such as soya or other plant based products.

UK exports would become uncompetitive. UK raw milk costs would rise because of rising domestic prices. UK exports to the EU would be subject to EU import tariffs and higher raw material costs. At the same time EU prices would fall because of the redirection of EU product normally destined for the UK back on to the EU market. UK dairy product prices would therefore become uncompetitive in the EU. UK exports to the world market would also become uncompetitive because of rising raw milk prices. UK exporters would also have the incentive of higher domestic prices to redirect product away from export markets.

Although UK milk production would rise to meet rising domestic prices, growth would be constrained by the delay in bringing on new productive capacity. Not only do calves take time to reach maturity but there would also be constraints on available processing capacity.

At the moment, the UK has the capacity to process current levels of milk production with the possibility of around 10% more. However, beyond this, new capacity would have to be built requiring significant investment and time. It could take two years or more to build new capacity on top of the time to gain permissions to build on a brown or green field site.

As a result of considerable inflationary pressure on consumer prices, the Government may be tempted to reach trade deals with dairy exporting countries which would bring cheap product into the UK but put the UK market in jeopardy for dairy farmers and processors in the UK.

Island of Ireland

The dairy industry on the island of Ireland acts as a single entity, facilitated by the free movement of milk, product and staff. A significant proportion of the dairy processing capacity in Northern Ireland (NI) is owned by dairy co-operatives from the Republic of Ireland (RoI), who depend on intracompany movement of raw milk, product and staff to achieve economies of scale and efficiencies.

An ‘all-island’ approach delivers a number of benefits:

• Staff in dairy companies with operations on NI and RoI can move freely between locations.
• Haulage, equipment and maintenance contractors can move freely to provide services and labour. 
• Companies can bring customers to facilities in both NI and RoI without visa impediment.
• Documentation associated with the movement of raw milk from NI to RoI is fit for purpose, simple and minimalist as both countries adhere to the same EU Regulations governing food safety, animal health and welfare, and environment.
• Movement of raw milk and dairy products between NI and RoI takes place without tariffs. 
• Without the interconnector with RoI, energy costs in NI would be even higher than they already are. As energy costs are second only to raw milk costs for dairy companies, maintaining this interconnector and the competition it brings to the NI market is essential.

Without the option of free movement of raw milk, product and staff, the sustainability of the Northern Ireland dairy industry, in its current structure and scale, is more than questionable.

It is therefore essential that a two way access for raw milk and dairy products should be maintained between Northern Ireland and the Republic of Ireland without tariffs and free from burdensome non-tariff administrative measures.

Role of EU labour in the dairy industry

Access to a skilled workforce is crucial for the UK dairy industry to remain competitive.

Dependence on non UK born labour varies greatly between the companies. At one extreme one small company reported 73% dependence and one major national player 21%. Reliance on non UK born labour is consistent throughout the industry regardless of scale. On average non UK born accounts for around 11% of the processing workforce.

EU-born UK nationals are tremendously important to the running of a number of UK processing businesses. For the most affected companies these staff are fully integrated at all levels of the business and performing essential tasks.

Agricultural policy

Dairy UK believes that the development of post-Brexit agricultural policy needs to take account of the following principles.

Ensuring Competitiveness

Protecting and enhancing the competitiveness of the dairy sector should be at the core of all aspects of agricultural policy.

As post-Brexit UK agriculture will most likely still be intimately tied to the EU market, then the UK dairy sector will need to be competitive against its European counterparts. Market pressure on the dairy sector is likely to intensify post-Brexit. The pursuit of Free Trade Agreements with non-EU countries offers opportunities but will increase the exposure of the sector to the world market.

It is therefore essential that agricultural policy should enable the UK dairy sector to compete in a challenging and market-driven environment.

Equitable Treatment with the EU

Assuming a tariff free deal with the EU can be reached, the UK dairy sector will have to compete with subsidised EU farmers. Therefore, it will be important for UK dairy farmers to have a level playing field with their EU counterparts, by maintaining similar levels of financial support.

Support under the EU’s Common Agricultural Policy ensures that EU milk production is higher than would be the case without subsidies, which acts to reduce the overall level of EU prices. In this price environment, direct payments become central to the viability of UK dairy farming.

Average Direct Payment to Dairy farmers by UK Country 2015

Removing basic payments in the UK would therefore have a significant impact on the productive potential of the sector.

Should the financial resources allocated to direct payments be reduced, these reductions should be compensated by resources being moved to schemes that improve the competitiveness of the sector in order to offset the loss of direct payments.

Schemes could include grant schemes for investment in certain technologies. Historically, such schemes have shown themselves to be effective in raising the productivity and consequently the competitiveness of agriculture.

Mitigating Price Volatility

Post-Brexit UK agricultural policy should address price volatility.

Price volatility is an inherent product of the exposure of the UK dairy sector to international market forces. Global commodity market price trends dictate UK price trends. Payments under the Basic Payment Scheme do not take account of the fluctuations in income created by price volatility.

It will be important to find new ways to mitigate the impact of price volatility on farmers. This could be either through focusing payments under the Basic Payment Scheme during price downturns, or through the provision of a subsidised income insurance scheme.

As each sector has its own unique price cycle, any system would have to be tailored to the needs of individual sectors.

Calculation of Aid for Public Goods by Income forgone

Income foregone should continue to be the basis for calculating aid for the supply of public goods.

Market pressures can prevent farmers from providing public goods, such as increased biodiversity, as this can require the use of productive assets. Therefore, aid for schemes such as agri-environment schemes designed to enhance biodiversity should be calculated on the basis of income forgone. This would ensure farmers are able to provide public goods without compromising their economic sustainability.
 

This would be distinct from measures designed to address negative environmental impacts. In these cases farmers should be given sufficient time to meet new environmental obligations along with temporary grant aid schemes when appropriate.

The current operation of biodiversity measures under the CAP need to be reviewed. Greening measures have not shown themselves to be effective and agri-environment schemes need to be simplified to encourage the participation by dairy farmers.

Maintaining Equivalent Standards with the EU

The UK should seek to maintain equivalent standards with the EU to ensure the absence of non-tariff barriers to trade.

The EU CAP covers a very broad range of areas many of which set standards which would be the basis for continued access to the EU market. The UK should therefore seek the greatest the possible continuity in standards to minimise the risk of trade disruption. Any evolution of UK standards should maintain equivalence with EU standards.

The EU is recognised as a world leader in setting standards for food safety. Maintaining equivalence with EU standards will also be important for trade with non-EU countries.

Ensuring the Availability of Trained Labour and New Entrants

Public education and training policy should take account of the needs of the sector and agricultural policy should facilitate new entrants into dairy farming.

The dairy sector requires a supply of skilled labour at all levels. Government policy should facilitate and encourage colleges and universities to provide the relevant training courses.

The dairy sector also requires new entrants at the farm level to replenish the sector’s demographic profile. Policies should be formulated to encourage new entrants to invest in the sector.

Minimising Distortions between the Countries of the UK

Competitive distortions that could result from differences in the agricultural policies of the countries of the UK should be minimised.

Agricultural policy is a devolved responsibility and the political and economic importance of agriculture varies between the countries of the UK. This has already created significant differences in the way the CAP has been implemented in the UK.

A mechanism should be put in place to try and minimise competitive distortions that could result from the separate development of agricultural policy in the countries of the UK.

23 February 2017