Summary
Given the UK’s dependence on dairy imports the pan-EU dairy company Arla is deeply concerned about possible dairy trade disruptions under a ‘hard’ Brexit. Concerns were expressed over the application of non-tariff measures to EU27/UK trade, which it was felt, could lead to acute port congestion. Particular concerns were expressed over the likely shortage of vets to inspect animal products if standard 3rd country controls were applied. There were also concerns over possible labour shortages in the sector. Some of these concerns were held to apply even under a ‘softer’ Brexit scenario. As with the Russian embargo any disruption of EU/UK trade could see increased exports to ACP markets, particularly in West Africa and Southern and Eastern Africa.
On 17th July 2018 the pan-European dairy cooperative Arla Foods issued a press release which highlighted how ‘non-tariff barriers to trade and restricted access to labour after Brexit will leave British consumers facing a dairy dilemma which could see the availability of butter, yoghurts and cheese become restricted’ (1). The statement from Arla was based on a report posted by the LSE by the ‘UK in a Changing Europe’ on the potential effects of a ‘no deal’ Brexit (see box for summary of the posted report) (2).
Arla maintained the issues identified in the LSE posted report could give rise to 3 possible outcomes:
- ‘It could become much more difficult to import dairy products from Europe, leading to a shortage both of dairy staples and particularly of products such as specialty cheeses, where domestic supply is constrained by limited production capacity in an already tightly managed supply chain’.
- ‘There would be escalating pressure on costs, and ultimately increased consumer prices for dairy goods’.
- Standards in the UK dairy sector could be undermined as pressure increased to ‘ramp up production and cut farm costs’, an outcome which it was maintained ‘neither farmers nor consumers would accept (3)’.
| Findings of the ‘No Deal’ Report in the Agro-Food Sector
In the agro-food sector it is foreseen that a chaotic Brexit would result in ‘both tariffs and border controls being reintroduced between the EU and the UK, slowing the flow of trade and affecting the entire food supply chains’. Overall it was argued ‘the impact on agriculture and food prices, while unpredictable is likely to be large’ but ‘will vary by sector’. The report argued that for products where ‘the UK is a net importer, such as fruits and vegetables, pig meat and beef, prices may rise significantly’. It was also maintained ‘imports of food and agricultural inputs, (e.g. fertiliser and pesticide) from the EU will cost more, while the UK’s exports will be less price competitive in EU markets’. This it is held will see UK consumer facing higher prices. The report believes food shortages will be unlikely because ‘major food retailers will be likely to have contingency plans in place to replace imports from the EU with domestic products and imports from outside the EU’. However some disruption of seasonal supplies would seem likely. Without a deal UK exports to the EU would immediately face standard MFN duties and 3rd country import controls. Based on currently stated UK positions, these EU MFN import tariffs would be reciprocated by the UK. |
These problems could be further compounded by ‘a shortage of vets, lorry drivers and farm workers post-Brexit’. It was acknowledged that ‘increased times for customs inspections at UK ports, with even a seven-minute additional waiting period for each inspection adding 10 hours of delays and additional costs of at least £111 per container’ (1).
Further delays could occur through the UK’s new Customs Declaration Service becoming over-burdened. The system has been designed to handle 150 million declarations per annum but a ‘hard’ Brexit could require the system to handle more than 250 million declarations per annum.
Further costs would also arise if products of animal origin were subject to standard 3rd country checks at the border where there is currently an absence of the necessary infrastructure along short sail routes to the UK/EU markets (1) (for more details on EU regulations on import controls on animal products from 3rd countries see companion epamonitoring.net article ‘Getting to Grips with the Import Controls Required If the UK Is Treated As Just Another 3rd Country’, 6 August 2018).
This situation could be further compounded by a potential shortage of vets for carrying out compulsory import controls. It is estimated the workload of vets posted at border control posts would be likely to increase 372%, with ‘no certainty that the system will continue to function adequately given these additional pressures’ (3).
Arla had previously highlighted how ‘a hard Brexit without a trade deal could have a disastrous impact on … (the UK)…dairy industry and its consumers’. The Arla statement notes however that even with a UK-EU deal aimed at ‘a softer departure from the European Union these major issues remain, posing a dilemma for the British dairy industry at large’. This was set against the background of a situation in the milk sector where milk producers have little or no profitability margins to play with.
The Managing Director at Arla Foods UK maintains a failure to ‘get the practicalities of Brexit right’ means the choice will be faced ‘between shortages, extra costs that will inevitably have to be passed on to the consumer or undermining the world-class standards we have worked so hard to achieve’ (1).
The Arla statement see’s the possible negative effects of a ‘no-deal’ Brexit in the context of the UK having ‘the second largest dairy trade deficit in the world’ (at up to 16% of consumption), with 98% of UK dairy imports originating in the EU. This reliance on imports from the EU in the dairy sector means ‘any problems at the border post-Brexit and shortages of labour in key areas are likely to have a major, and predominantly negative, impact on the domestic market in the form of shortages of products and significantly higher prices’. This it is maintained could turn ‘every day staples, like butter, yoghurts, cheese and infant formula, into occasional luxuries’ (1).
It was noted that while ‘Brexit might bring opportunities to expand the UK industry in the long term, in the short and medium term we cannot just switch milk production on and off’. It was noted how ‘increasing the UK’s milk pool and building the infrastructure’ for the UK to become self-sufficient in dairy sector ‘will take years’ (1). In this context Arla representatives called for a UK/EU trade deal which would allow continued ‘frictionless customs arrangements and ready access to key labour in the years ahead’ (1).
| Comment and Analysis The intervention of Arla UK in response to the LSE posted analysis of the impact of a ‘no deal’ Brexit highlights the multi-faceted nature of the challenges faced within the Brexit process and the potential for dairy sector disruptions even under a ‘softer’ Brexit scenario.While with the exception of South Africa no ACP country has a dairy sector export trade into the EU28, any disruption of EU27/UK trade could increase pressure on EU27 exporters to find alternative markets. On the basis of the experience of the dairy sector consequences of the August 2014 Russian import ban, a ‘hard’ Brexit related disruption of EU27/UK dairy sector trade flows could see a further major expansion of EU milk powder exports to sub-Saharan African markets. This is likely to be heavily focused on West Africa where EU corporate investments have left a range of EU companies well placed to maximize profits retained from local value added packaging and processing of bulk milk powder imports for national and regional markets (see companion epamonitoring.net article, ‘Dairy UK and the European dairy Association (EDA) Launch Joint Position to Minimise Brexit Related Dairy Sector Disruptions’, 26 July 2018). However, it will also be likely to impact on Southern Africa, where the leading dairy exporting company Ornua in August 2014 set up a local office to handle distribution of Irish dairy products across the Southern African region and as far afield as Malawi, Angola, and the DRC (Nigeria is dealt with separately following the establishment of a Ornua joint venture facility in Nigeria in December 2015 and the subsequent securing of compliance recognition for exports to take place from this facility to markets across West and Central Africa). The response of Ornua to Brexit pressures will be important, since the Irish dairy sector is likely to be the EU27 member state most severely affected by a ‘hard’ Brexit. Since the establishment of the Ornua office in the South African port of Port Elizabeth, Irish exporters have played a major role in the more than 3-fold expansion in EU butter exports to South Africa between 2014 and 2017. By 2017 butter accounted for 13.9% of the value of EU dairy exports to South Africa (excluding ‘fat filled milk powders’), up from 4.6% in 2014. This meant that in 2017 the South African market took some 4.9% of total extra-EU butter exports, compared to 4% in 2014, in a context where total extra-EU butter exports increased 200%. EU Butter Exports to South Africa Bu Main EU Exporting Member State (Tonnes and € millions)
Source: EC, Market Access Data Base, http://madb.europa.eu/madb/statistical_form.htm |
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Sources:
(1) Arla, ‘Britain’s biggest dairy company warns of dairy dilemma of impossible choices post-Brexit’, 17 July 2018
http://www.mynewsdesk.com/uk/arla-foods/pressreleases/britains-biggest-dairy-company-warns-of-dairy-dilemma-of-impossible-choices-post-brexit-2586695
(2) UK in a Changing Europe, ‘Cost of No Deal’, 29 July 2017
http://ukandeu.ac.uk/wp-content/uploads/2017/07/Cost-of-No-Deal.pdf
(3) Dairyreporter.com, ‘Arla foresees post-Brexit dairy problems for UK consumers’, 17 July 2018
https://www.dairyreporter.com/Article/2018/07/17/Arla-foresees-post-Brexit-dairy-problems-for-UK-consumers
(4) Dairyreporter.com, ‘Ornua expanding presence in budding Nigerian market’, 15 December 2015
https://www.dairyreporter.com/Article/2015/12/15/Ornua-expanding-presence-in-budding-Nigerian-market
(5) Ornua, ‘Annual Report 2016, March 2017
http://www.ornua.com/docs/default-source/annual-reports/ornua-annual-report-2016.pdf?sfvrsn=2