The future of the UK’s agricultural trading sector is uncertain in light of the possible scenarios surrounding the UK’s exit from the European Union.
By the end of March, the UK government will have either settled on the terms of a withdrawal agreement with the EU or be left with “no deal”. In either circumstance, the landscape of the UK agricultural industry will inevitably change. This is certainly the case for the UK dairy industry.
The UK runs the second largest dairy trade deficit in the world. Currently, 16% of the UK’s dairy is imported with 98% of these imports of EU origin. This trade with the UK constitutes 10% of the EU’s total dairy exports with Ireland and France being the major exporters of dairy products to the UK. Looking at the UK’s exports, 91% of UK dairy exports are destined to the EU. With trade links between the UK and EU as heavily tied as they are, the Brexit deal has the potential to disrupt this trade and alter the UK dairy industry.
The future terms of UK and EU trade are currently under negotiation and if the UK and EU fail to reach a trade agreement, the UK will have to abide by the World Trade Organisation’s “Most Favoured Nation” tariffs. Under WTO ruling, the average Most Favoured Nation tariff the EU could place on UK dairy is 18.3% while the average tariff the UK could place on EU dairy is 14.2%. These tariffs would mitigate the competitiveness of UK dairy products in the EU whilst also making EU dairy expensive to import. Perhaps the most significant impact would be that the vast volumes of UK raw milk sent to Ireland for processing, only to be imported back to the UK, would be subject to tariffs, causing these arrangements to become highly unprofitable.
Another potential outcome of a “no deal” Brexit is increased border checks on all goods. The EU’s single market and customs union allows for frictionless trade at borders. In the case of leaving the single market and customs union, customs declarations would be required on all EU goods at the UK border. Currently, the UK’s customs declaration service is designed to handle 150 million declarations per year, but post-Brexit, this could be increased to over 250 million per year. It has been suggested that for every 7 minutes of customs check times at border ports, transportation times will increase by 10 hours. Not only will this mean greater traffic with transportation lorries, but firms hoping to transport dairy products may have to invest in setting up additional storing facilities to preserve their goods. The current dairy trade is reliant on just-in-time production, and so these time delays at the border could have a substantial knock-on effect on production costs. On top of these additional storing facilities, other costs may be impacted such as fuel costs and increased wages for distributors.
Leaving the EU single market may introduce these dilemmas to the UK dairy industry but with change also comes opportunity. The UK’s dairy trade deficit means that a reduction in imports of EU dairy post-Brexit will require import substitution. The UK currently does not have the processing capacity to completely replace imports but this presents UK dairy producers with an opportunity to grow and expand operations in order to do so. UK dairy processors have the knowledge to produce dairy products and with some investment in facilities, the UK can become self-sufficient in providing dairy domestically.
Additionally, there is an opportunity to form new trade deals with growing and emerging markets and build bridges with economies that the UK has previously not had ties with. Dairy consumption is growing in Asia and the Middle East where growing middle-classes are introducing more dairy into their diet. These opportunities have already begun to be seized by the UK who signed a major dairy deal with China in August 2018. The trade agreement allows China to import UK dairy products made using milk from third countries and is worth an estimated £240 million over 5 years to the UK. This is an example of new and emerging export opportunities that can be explored., However, for markets further away than the EU geographically, dairy exports will be limited to those products with longer shelf lives like cheeses, milk powders and butters that can be frozen.
In light of all these considerations, the dynamics of the UK dairy industry are very likely to change regardless of which deal is agreed on by March 29th. UK producers are faced with an opportunity to expand and invest in operations in order to replace the potential dairy dearth left by a reduction in EU imports. Simultaneously, the UK are faced with the task of growing and diversifying export markets and increasing the competitiveness of UK dairy products abroad. Meanwhile, innovation in transporting, processing and storage could also be a consequence of venturing into distant markets and developing domestically. Whilst all Brexit scenarios are speculative to some degree, what we can be certain on is that in order for the British agri-food industry to sustain, it must adapt to the circumstances that present itself when the March Brexit deal is finalised, whatever they may be.