Report 35 – Released on August 29, 2019

WESTERN OVERVIEW

As it now stands, on October 31, the United Kingdom will withdraw from the EU. With no further legislative action, that will result in what is called a no deal, or ³hard´ Brexit, abruptly altering decades of dairy production/processing/manufacturing integration between the United Kingdom and remaining EU countries. Such a result would present new obstacles and market friction related to customs control of imports/exports, tariff issues, etc. Certainly there will be an impetus to maintain established trading relationships if that can be made to work in a cost sense.

Uncertainty is increasingly evident as October 31 approaches. For January ± June, 2019, the tables below show, for each dairy product, what volumes in MT, and percentage, of UK production went to or came from other EU countries (CLAL dats provided to USDA.)

 UK DAIRY EXPORTS TO EU
     Jan. ± June 2019

     Commodity  %   MT

     Cheese     75  76,800
     WMP        78  31,100
     Butter     95  36,100
     SMP        50  19,800
     Whey       79  29,200
     Bulk Milk 100 426,000

     UK DAIRY IMPORTS FROM EU
     Jan. ± June 2019

     Commodity  %   MT

     Cheese      94 247,400
     Butter      96  35,700
     Whey       100  47,000
     Bulk Milk   99  76,400

A number of European dairy industry professionals believe it will be necessary for the UK to continue to import cheese and butter to cover domestic demand. They note that the UK is currently a net importer of cheese and butter. Whether the source will be EU countries remains to be seen. One expert notes that with a hard Brexit, moving dairy products across the EU border will take longer and be more complicated. As a consequence, the imported products will be more expensive.

Less certain is whether the remaining EU countries will be as motivated to import cheese or butter from the UK. There is a substantial existing source of milk, butter and cheese in the EU without the UK. That may leave the UK facing a challenge as to future UK production of butter and cheese, as well as export options. The UK is a net exporter of SMP. While about one half currently goes to EU countries, focused marketing efforts might find other non-EU destinations if cost and other factors cause changes in existing patterns. Obviously, the EU manufactures plenty of SMP so post-no deal Brexit it will be challenging for the UK to deliver SMP newly subject to tariffs, to existing EU customers, as competitively priced, as currently. Nevertheless, this is also a matter of uncertainty. A stress point underlying much current political disagreement involves the border between Ireland (an EU member state) and Northern-Ireland (part of the United Kingdom).

In many ways, how that border is handled underlies the current situation. Bulk milk is a big problem, especially because fluid milk is so perishable and bulky to transport. Industry officials note that currently the UK does not have the processing capacity to handle all UK milk production. A good deal of milk produced in Northern Ireland (UK) currently moves to the Republic of Ireland (EU) for processing. Here is the border issue again. There is a tariff on bulk milk imports to the EU which will attach to this milk after Brexit. The tariff would diminish profitability of the existing pattern. However, if milk from Northern Ireland will have to be shipped back to mainland Britain, even assuming processing capacity can be found, that will also be logistically challenging. Among EU countries, the Republic of Ireland seems likely to be most adversely affected by Brexit. Irish milk will be less able to be efficiently exported into the UK, currently a significant destination.

Customs challenges will add to efficiency/profitability issues. The UK market is currently a significant destination for Irish cheddar. A no deal Brexit would cause active efforts by the Republic of Ireland to find other markets for cheddar. None would likely be as profitable as shipping the short distance to the UK. In the short term, many Irish cheese manufacturers have already moved larger than normal amounts of cheese into the UK. This cheese will not be affected by Brexit. Once these stocks are sold, the impact will begin to be felt.

There is very active work underway to analyse the issues a no deal Brexit will generate for the dairy industry. Little has been resolved in terms of outcomes, now with two months to go. Cheese production in the EU remains in good balance between supply and demand. Export interest is steady. EU cheese exports January – June 2019, 423,610 MT, increased 1 percent from January – June 2018, according to Eurostat.

     EU CHEESE EXPORTS ± TOP 3 DESTINATIONS
                  MT              PERCENT CHANGE
     DESTINATION  Jan.-June 2019  Jan.-June 2019/2018

     USA          63,263          +4
     Japan        56,989          +6
     Switzerland  31,328          +0

EASTERN OVERVIEW

Cheese exports from Belarus January – June 2019, 115,000 MT, increased 18.5 percent from January – June 2018, according to CLAL data provided to USDA. The vast majority, 109,352 MT, went to Russia, up 18 percent from January ± June 2018.

Although butter exports from Belarus January ± June this year, 41,000 MT decreased 4.4 percent, exports to Russia, 32,420 MT, increased 32 percent.

Information for the period August 19 - 30, 2019, issued biweekly

     Published by:
     Dairy Market News - Madison, WI
     Eric Graf, 608.422.8590
     Email: Eric.Graf@usda.gov

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