A “no deal” Brexit: European Dairy Association exec warns of “catastrophic” repercussions for highly integrated sector

11 Jan 2019 --- The Secretary General of the European Dairy Association has warned of the “catastrophic” impact that an increasingly likely “no deal” Brexit scenario would have. He foresees repercussions that are far more severe than the Russian ban on dairy imports in 2014, with “a whole new scale of crisis” on the cards. While contingency plans are already in place in terms of stockpiled dairy ingredients, likely consequences will include a temporary consumer price increase on UK sold dairy products in the EU, as new supply chain systems are considered.

“We saw a really deep dairy crisis after the Russian ban for dairy in the EU back in 2015 and 2016. And if you compare that with the Brexit potential, you can see it is a completely new scale of crisis,” Alexander Anton, Secretary General, European Dairy Association (EDA)/European Whey Processors Association (EWPA), tells FoodIngredientsFirst in a detailed interview.

Volumes of EU-27 butter sold in the UK are three times higher than EU-28 butter exports to Russia were. For cheese, EU-27 exports to the UK are twice the volumes that used to be sold to Russia. “The market share we have with the UK is much larger than what we had with Russia. We all remember the deep crisis that this Russian ban triggered for the dairy industry and producers, so the Brexit no-deal would mean a whole new scale,” he adds.

Few sectors could be more prone to the impact of a “no deal” Brexit scenario than dairy, with vast volumes of product moving between the UK and EU trading partners on a daily basis. With just days left before the crucial Westminster vote on the Withdrawal Agreement in the UK Parliament and weeks before the March 29 date, there is still little clarity for a sector that traditionally offers low shelf-life products and requires highly integrated supply chains. The liquid border that exists between Northern Ireland and the Republic of Ireland is central to the debate and is also crucial for milk processing trade. 

The EDA has been lobbying on this issue for some time, with an unsuccessful joint plea submitted together with Dairy UK at the beginning of 2018 to the key negotiators of both sides, Michel Barnier (EU) and David Davis (the UK Brexit Secretary at the time). 

The Future UK-EU Dairy Framework’s main priority is that the relationship between the EU and the UK remains as close as possible to the status quo after Brexit and throughout a transition period. “The UK should preferably remain part of, or at least as close as possible to, the EU Single Market and the Customs Union. This would secure the free movement of milk and dairy products between the EU and UK with no tariffs or quotas from either side for milk and dairy products, and limit non-tariff barriers to trade (SPS/TBT) as much as possible. The EU and UK should have no (significant) divergence in the regulatory sphere when it comes to policies affecting dairy and dairy products and a level playing field should be sustained,” it argued. 

“We found consensual solutions for the issues in the dairy sector from both trade associations. Regrettably, politicians would not go forth with the solutions, however, as they opted against taking a sectoral approach,” Anton notes.

The paper did not hold back. “We painted a catastrophic picture on a ‘no-deal’ Brexit, because that's what it is. We are talking about Ireland and the single market, with fully integrated supply chains between the UK and Europe. We are talking about dairy exports, but of course also of exports from the EU to the UK,” he adds.

The regulatory picture for dairy in a “no deal” scenario could indeed mean anything. “If there is no deal and we don't see any approval of the products in the UK, in such a scenario, how will the products in the UK and the EU be proofed from a safety or sanitary standard?” he asks. 

Alexander Anton, Secretary General,
European Dairy Association (EDA)The report was aimed at illustrating the scale in terms of volumes. “The dairy markets are really integrated. The UK is not self-sufficient in milk, so it needs trade and imports. We had a success story so far between companies in the EU and UK to create that integrated supply chain,” says Anton. “And I am not even touching on the island of Ireland where we have about of 80 percent of the Northern Irish milk that goes to the South to be processed there. And then there are the follow-up issues about what about skilled labor, customs issues and the regulatory divergence,” he adds.

The EDA is still keeping its fingers crossed on a successful vote next Tuesday. “We were happy to see Michael Gove, the British Agriculture Minister, support the deal that Prime Minister May proposes. So, it is our hope that this deal which has been discussed and decided at EU level together with the UK would be ratified by British Parliament,” he adds.

But of course this scenario is highly unlikely and industry has therefore been preparing for a “no deal” Brexit for quite some time. “What has happened so far within the dairy industry is that we have built up stocks in case there would ever be disruption in the transport and logistics, so that we would be able to cover a certain period of time,” Anton says. “But then it really comes to the nitty gritty as it would be difficult to keep that supply chain in place. What to do next is up to the companies involved. I know that the companies who are involved in milk processing in both the EU and UK have their contingency plans in place. But it will not run smoothly, leading to a disruption in stocks at supermarkets, for instance, and a very likely a response at a price level on a consumer level,” he adds. 

Right now the dairy markets are in balance at both an EU and global level and basically there is a very good situation in place, Anton explains. However, the UK is not self-sufficient for the time being and this will present a challenge. “There is milk available on the market, but the problem will be to get the milk into the UK through customs. Wherever you buy the milk powder or butter there will be a customs issue and the supply chains are for good reason built up with the continent in mind. I don’t think there will be a dairy-specific long term price effect but there could be a shortage in milk supply,” he adds.

Today it emerged that the UN’s FAO Dairy Price Index declined by 3.3 percent from November, marking its seventh successive monthly drop, led by lower price quotations for butter, cheese and whole milk powder. The index fell by 4.6 percent from 2017, as a result of declines in the prices of all dairy products during the second half of the year, the Agency said. 

A Rabobank report (July 2016) published shortly after the Brexit vote reported that the UK is circa 77 percent self-sufficient when it comes to milk production. Levels of future trade will depend on tariff levels for imports into the UK. Current WTO tariff levels for dairy products entering the UK from outside the EU are set at an average of 40 percent, it noted.

Ireland is spreading its bets in order to be somewhat less susceptible to a Brexit cliff edge. Yesterday, despite what it called “a year of unprecedented global volatility, involving political uncertainty, extreme weather events and continuing currency fluctuations impacting competitiveness,” the value of Irish food, drink and horticulture exports reached €12.1 billion (US$13.9 billion) in 2018, down just 4 percent from a record high in 2017. According to Bord Bia’s (the Irish Food Board) report, dairy was the strongest performer in terms of export volume growth in 2018, with volumes up 5 percent compared to 2017. 

The value of dairy exports remained stable, exceeding €4 billion for the second year in a row. Butter had an exceptional year in the US and continental Europe and for the first time the value of Irish butter exports exceeded €1 billion for the year, representing a 22 percent increase on 2017’s value. More than 50 percent of Ireland’s cheese exports – of which 83 percent is cheddar – is destined for the UK. However in 2018, 22 percent of cheese exports were destined for countries outside of the UK and continental Europe, a significant increase from 17 percent in 2010. In 2018 the value of cheese exports to Asia and to North America increased 12 percent and 35 percent respectively to a total value of €75 million.

Of course, Brexit is not the only trade concern right now, with other geopolitical events hampering trade, including the standoff between the US and China over tariffs. 

Anton is grateful for the EU’s ambitious policy on multi-national trade processes, which has scored several recent success stories, including a massive deal with Japan at the end of 2018. “We have a clear ambition that was deployed by the EC two years ago. What happened in the last years in dealing with countries such as Vietnam, Singapore, Japan, Mexico, Australia and Canada is that there has been a tremendous amount of progress made in the bilateral free trade arena,” he notes. “These free trade agreements include more than 1.2 billion people. That is tremendous progress that we didn’t have for the previous 50 years,” he adds. 

However, he accepts that these are complex times. “Within the global trade arena, you would prefer to have leaders who are all pro free trade. The TTIP (Transatlantic Trade and Investment Partnership) is dead, but other frustrations that we see between other powers is something that worries us,” he adds. “We are happy the deal that Commission President Jean-Claude Juncker had with US President Donald Trump. This shows its results with record imports of US soy to Europe, which is good. So we are hoping to see a certain cooling down of that heat on the international trade arena,” he adds. 

Chinese expansion opportunities also exist. Just this week, Finland’s Valio consumer-packaged infant formulas received an export permit from the Chinese authorities, which will allow the company to export its powdered infant formulas into China, for example. 

For Anton, China is “a challenging but fantastic potential trading partner,” with enormous untapped potential. “China recently published a new dietary guideline, where they claim that an adult Chinese person should consume around 300g of milk a day,” he notes. “If every adult Chinese adult would consume that level, they would need 120 million tons of milk a year,” he adds. 

To put this into perspective, this is 15 percent of the world’s milk production. “That is equivalent to 120 percent of US milk production and 70 percent of European milk production. Chinese national production sits at a mere 35MT, but 120MT would be required,” he adds. He notes growth potential in China and other South-East Asian markets for the coming years, even though it depends on the actual market behavior of China and its political decisions.

Despite the current challenges around trade agreements and a no deal Brexit possibility, the EDA Secretary General remains confident on the future of the European dairy segment. “We have 700,000 committed and well trained dairy farmers across the Union. We have 300,000 people employed by the dairy industry in the processing side. We have 10 out of the global top 20 dairies headquartered in Europe and we are the number 1 milk exporting region in this world,” he explains.

He notes the “tradition of the past, the knowledge of today and the passion for the future,” as all boding well. “If you look at a young dairy farmer and see the enthusiasm that they have for their animals and product. If you see the cheese or yogurt makers and the energy with which they do their job. If you see the pleasure and joy you have when enjoying a dairy product. That’s why we are the world’s number 1 exporter of dairy products. Even within the internal market within Europe, there are parts of the market that we can still explore,” he concludes.

By Robin Wyers