Could dairy deal with a no-deal?

There is no use crying over spilt milk. So while the British dairy industry expressed concerns about the potential impacts of Brexit ahead of the 2016 referendum, it was willing to accept the outcome. The prospect of a no-deal, though, was harder to swallow. Speaking after the government outlined its temporary tariff regime in March, Dairy UK CEO Judith Bryans warned the only answer to avoiding “a severe price shock” to the dairy industry – with long-term impacts on productivity – would be to reach an agreement with the EU ahead of Brexit.

Six months later, and MPs have moved to block a no-deal Brexit in October. But uncertainty over the UK’s future relationship with the EU pervades. So why would no-deal be such a problem for dairy? And what have British and Irish businesses been doing to prepare for potential disruption to trade?

Undoubtedly, the biggest challenge for the British dairy sector in the event of a no-deal Brexit would be disruption to trade with the ROI. From 2013 to 2017, it accounted for 71% of UK dairy exports and over a third (33%) of UK dairy imports [AHDB].

In volume terms, liquid milk and cream is the most significant export product for the UK dairy sector, averaging 680,000 tonnes a year over the five-year period. The vast majority of this (92%) is milk exported to the ROI from Northern Ireland (NI) for processing, with a proportion of the finished product returning to the UK market for sale.

“That’s pretty much the only milk flow we have out of the UK. There’s not a lot that goes to mainland Europe, but there is quite a bit that goes from NI to the ROI and back again,” says Chris Gooderham, AHDB head of market specialists (dairy & livestock).

According to Bord Bia figures, around 800 million litres of milk a year flows from NI to the ROI, most of which is collected by processors that will “typically have farmers supplying them on both sides of the border”, says Padraig Brennan, meat, food & beverages director at Bord Bia.

“The biggest challenge for the dairy sector in the event of a no-deal Brexit would be disruption to trade with the ROI”

“Depending on the shape of Brexit, that is a trade that could be shaped severely in terms of how it operates, or whether it can continue to operate,” he adds.

If the UK doesn’t manage to strike a deal with the EU ahead of Brexit, it may no longer be legal to mix milk from the north and south. And milk travelling south over the border would be subject to tariffs and customs checks on entering the ROI. According to analysis by the BBC, the average trade price of a litre of British milk is 26p. In the event of a no-deal Brexit, tariffs of 19p per litre would be applied, pushing the price up to 45p in the ROI.

“The tariff to take raw milk across to the ROI for processing would effectively stop that happening,” says Gooderham. “It would be cheaper to bring it across on the ferry to mainland UK. But the big question is whether we’ve got the processing capacity in the rest of the UK to manage that.”

Processing capacity is particularly tight in the spring, when UK milk production is at its highest. So the industry was relieved to see Brexit pushed back from its original March deadline. “There is no way we would have coped with NI milk in the spring because all the factories in mainland Britain would have been at capacity anyway,” says Gooderham.

Regardless of the timing, however, a no-deal Brexit would cause big problems for farmers in NI. A third of their milk is currently sent south of the border and if that trade stopped they would have to cut back their herds “within weeks”, experts have warned. One industry source told BBC Newsnight that some 45,000 cattle could be culled in NI as a result.

The Ulster Farmers’ Union has subsequently rebuffed that claim, insisting the NI dairy industry would “find a way to cope if there is a surplus of milk”. But it also warns a no-deal Brexit would be “catastrophic” for NI farming, with increased checks and regulations set to cause “huge disruption and a logistical nightmare for family-run farm businesses”.

And milk isn’t the only important trade flow between the UK and Ireland. The UK also imports over a third of its cheese from the ROI, totalling around 135,000 tonnes a year [AHDB].

“There is a long-standing tradition of Irish cheddar going to the UK and relationships with customers at retailer, foodservice and manufacturing level have been built up over many, many years,” Brennan adds.

Stockpiling

In a bid to minimise short-term disruption to supplies, Irish cheddar processors began stockpiling in the run-up to March. Among them was Ornua, which has since been replenishing its stocks, says MD Bill Hunter. “We have a good level of cover for a period of time with the stock we have on the ground.”

In the longer-term, however, a no-deal Brexit would pose a big challenge to Irish suppliers, suggests Brennan. Under the government’s temporary tariff schedule published in March, the UK would charge tariffs on imports of cheddar from the EU – including Ireland – in the event of a no-deal.

“Obviously any shape of tariffs would have significant disruption in terms of our ability to supply the UK market,” Brennan adds. “Assuming we were still in a position to be competitive going into the UK market, the regulatory checks and logistics complexity a no-deal Brexit would bring would add a lot of cost to the supply chain of cheese coming from Ireland.”

A n0-deal Brexit would also cause a headache for UK cheese processors, says Wyke Farms CEO Rich Clothier. Most cheese packaging machines come from Germany or Eastern Europe, he notes, while something like 80% of flexible packaging is imported from mainland Europe. “CO2 is the same. Cleaning chemicals for plants, such as caustic soda, acids for cleaning calcium out of milk pipes, virtually all of it comes from Europe now.”

“The industry doesn’t have a great record for having any sort of slack in the system”

It would be “very difficult” for British cheesemakers to operate if any of those inputs were subject to post-Brexit delays or disruption, Clothier adds.

“If we look at the CO2 fiasco last year, the industry doesn’t have a great record for having any sort of slack in the system,” he says. “That was caused by one or two plants closing at the same time – one on a breakdown and one on annual maintenance. But it caused massive disruption.”

In a bid to prevent against potential disruption ahead of the October deadline, Wyke secured an extra £1m finance for stockpiling of parts and components, flexible packaging and chemicals. But there is a limited amount UK processors could do to prepare, Clothier warns. “We can plan and try and get our farmers to plan,” he adds. “But if farmers don’t have the equipment to wash their dairy parlours and milking equipment we can’t pick up milk and we can’t keep making cheese.”

A n0-deal Brexit would also put huge pressure on the UK’s haulage sector, with potentially big implications for deliveries. According to the government’s leaked Operation Yellowhammer report, queues to cross the Channel could lead to lorries being held up at ports for days at a time. “We don’t have enough capacity in the UK transport infrastructure to allow for that,” Clothier says.

Hunter agrees that while the industry has been doing its best to put in contingency plans, it’s hard to gauge how prepared the UK is as a nation given the ongoing uncertainty around what would happen under a no-deal scenario. “Disruption to movement of goods is an unknown at this point,” he adds. “We don’t know whether it will be a day’s delay, a week’s delay or whatever.”

Lack of clarity

It is the potential impact on exports, though, that has the industry really worried about a no-deal. Liquid milk flowing from NI to the ROI is the UK’s biggest export in volume terms, but cheese is the biggest earner. On average, the UK exports 150,000 tonnes of cheese per year, with a value of £495m. And the vast majority of this cheese (83%) goes to the EU, where it would face “huge” tariffs in the event of a no-deal, warns Gooderham.

“It’s all very well the UK announcing low import tariffs, but our exports would still be faced with EU tariffs,” says Gooderham. “And the EU can’t do anything about that. Without an agreement with the UK they are not allowed to reduce those tariffs because the UK would just be a third country, and if they reduce it for us they’d have to reduce it for every other country.”

Some UK exporters have been building up stocks in Europe to protect against potential no-deal disruption in October – which would have coincided with the crucial Christmas trading period.

“We have taken on more storage in France and we will store more packed product in France,” says Clothier. “We’ve rationalised the SKUs and we are doing daily deliveries in Europe now from hub depots, so we can manage that a bit.”

However, with some of the tariffs into the EU so big they would stop trade in the longer-term, exporters have been forced to look further afield for future growth opportunities. Wyke has been “actively concentrating” on new regions outside the EU and is targeting the US, Canada, India and Japan, says Clothier.

Unfortunately, trade with some of these markets has also been hit by ongoing Brexit uncertainty. If the UK left the EU without an agreement, it would also lose existing free trade arrangements with markets like Japan and Canada, meaning UK cheese exports could once again face tariffs in those markets. “We’ve got customers in Canada today that aren’t making commitments going forward because we don’t know where we’re going to be,” Clothier says.

Even exporters sending cheese to countries that don’t have an existing free trade agreement with Europe have faced disruption. In the run-up to March, Somerdale built up stockpiles in the US and Australia and stopped shipping in the final weeks before the planned Brexit deadline, because it wasn’t sure deliveries would be accepted when they arrived.

“If something was sent at the end of March and didn’t arrive until April, there was a chance the authorities would have said ‘it’s got an EU export licence but it’s coming from a non-EU country, so we won’t let it in’,” he says. “The chances of it being turned away are small, but when it’s a shipment of £200,000-worth of cheese, it’s a big risk.”

Those risks remain ahead of October, but Somerdale hasn’t taken the same precautions the second time around. “We delayed shipping at the end of March and then, of course, nothing happened. So my feeling was we just carry on now and see what happens,” Jones adds.

It’s a gamble that might well have paid off, given recent efforts by MPs to block a no-deal in October. But while the industry will no doubt welcome the fact huge disruption ahead of Christmas is looking increasingly unlikely, the ongoing uncertainty around what Brexit will mean for the UK’s future trading relationship with the EU is arguably just as problematic for the industry.

“It’s the lack of clarity on what the playing field looks like that’s the problem, rather than what it actually looks like,” Gooderham says. “They’ll all adapt to what they need to adapt to, but while they’re playing blind, that’s almost impossible.”

Irish firms work with UK customers to overcome no-deal issues

Deal or no deal, Irish food businesses are committed to maintaining trade with Britain after Brexit, insists Padraig Brennan, meat, food & beverages director at Bord Bia.

“They value the UK market as much as they ever did,” he says. “Over the past 12 months something like 50% of the 130 companies in our Brexit barometer have increased trade with the UK and eight out of 10 see potential to grow their business in the UK.”

It’s easy to see why. Of Ireland’s €4bn in dairy exports, almost €1bn goes to the UK every year. “It’s our single biggest market in terms of exports,” Brennan says.

As a result, Irish dairy companies have been doing all they can to prevent disruption in the event of a no-deal.

That includes stockpiling, as well as mapping out supply chains to identify any weak points in terms of logistics, working through the options for minimising delays should they face border inspections, and calculating the potential cost of customs and tariffs. “Eight out of 10 companies we spoke to were having at least monthly conversations on Brexit planning,” Brennan says.

Irish dairy firms have also been working closely with their customers in the UK to understand what their expectations and requirements of suppliers would be under different scenarios.

“A lot more of those conversations have happened over the past nine months,” Brennan adds. “If Irish exporters have one ask it would be that those conversations continue so there is limited surprise should one of those scenarios happen.”

Irish dairy production has gone through a “substantial period of growth” since the end of the EU quotas in 2015, and some cheddar suppliers are looking at diversifying into mozzarella production
to spread the risk.

However, that won’t affect availability of cheese for the UK.

“Ultimately, from an Irish export point of view, we want to be able to get our product into the UK market and be competitive,” says Brennan.