Hoogwegt Horizon August Article

More than seven months have passed since the Brexit transitionperiod ended on Dec. 31, 2020, the day the United Kingdomformally exited the European Union customs union and singlemarket in accordance with the UK-EU Trade and CooperationAgreement. The changes marked the end of frictionless tradebetween the European Union and United Kingdom, as well as thefreedom of movement of workers. Prior to that, on Jan. 31, 2020,the United Kingdom left the European Union’s politicalinstitutions, including the European Parliament and EuropeanCommission.

Since then, robust debate has occurred on the potential lastingeffects of Brexit on the UK economy. While the UK economy isexpected to see employment losses in certain exposed servicesand trade-dependent sectors, access to free movement of laboracross the European Union is expected to cause worker shortagesin many sectors including foodservice and agriculture.

Effects on Trade Considerable

In addition to logistic costs and delays in documentation, theongoing impacts on cross-border trade between the EU-27 andUnited Kingdom are considerable. The effects of Brexit alone onthe UK dairy sector have been masked by COVID-19, which in thefirst half of this year has been more disruptive to the UnitedKingdom relative to other parts of Europe, given the severity andlength of lockdowns required to quell the virus.

Sustained strength in grocery channel sales due to COVIDrestrictions has helped to keep the United Kingdom’s dairymarket relatively calm. Wholesale markets made a quick recoveryand have been relatively stable since the initial shock of COVID’sarrival in early 2020. Cheese and butter prices steadily improvedin the first half of 2021 to exceed 2019 prices. And whilefavorable seasonal conditions in spring brought stronger milkproduction growth, the market absorbed it as demand improved.

Lower year-over-year commodity imports have also contributedto the stability. Year-over-year UK cheese imports, almostentirely from the European Union, were down 17%, or 30,000metric tons (MT), in the first five months of 2021, due not only tothe closure of restaurants but also to the increased cost of trade. However, UK cheese exports (mostly EU-bound and largelyspecialty lines) plunged 47% over the same period and by avolume similar to the loss in exports. However, the mix ofproduct types between these trade flows differs, and specialtycheese exporters have been adversely affected by the changes.

Meanwhile, 2021 UK butter imports have dropped nearly in half,while exports have slowed to a trickle. The post-Brexit lull intrade has been deep due to the building of stocks that occurredprior to the end of 2020. For perspective, between June 2020 andMay 2021, UK cheese imports were down just 7%, while exportsfell 18%. Over the same period, butter imports fell 16%, andexports, which likely will continue to weaken, plummeted 49%.

Some of the more complex consequences of Brexit are yet to beresolved. The cross-border movement of goods (including bulkmilk and dairy products) between Northern Ireland and Ireland,while meant to be frictionless, include potentially unworkablemeasures and threaten to revive historical political tensions.

Part of the United Kingdom’s rationale for leaving the EuropeanUnion was to find its own opportunities in the trading world. Thecountry has already signed a deal in principle with Australia (thefirst) and talks with New Zealand and the United States areunderway with potentially large consequences for dairy trade.

World Comment

In last months’ issue we spoke about a more equal playing field between the bulls andthe bears. In the todays market we see that the market direction and sentiment stronglydiffers per region. Although the market is typically very calm during the summer holidayperiod we now see in Europe a fairly firm market, mainly caused by the disappointingmilk production, both in volume as in protein and fat-values. This lower output is mainlycaused by weather, but as well by high feed prices. The Southern Hemisphere is expectedto have a strong start of the new season, both in Oceania and Latin – America circumstances are very favorable.

On the demand side we see that China and South-East Asia (SEA) are, again, suffering from strong government restrictions after number of COVID-19 cases have increased. Some the SEA countries expect that the import / consumption of dairy products could drop up to 30%. Chinese buyers reportedly already covered a decent share of their Q4 needs and local stocks could slow down import needs for the comingmonths. Middle – East and North African buyers are expected to come back in the coming months after a slow first half of 2021.Logistical constraints are adding even more uncertainty to the global dairy market dynamics and price direction remains very uncertain.

Easing Restrictions Mask Brexit’s Impact

Recovery in the overall UK economy from the effects of COVIDwill be uneven. It could be several years before COVID is beatenin the United Kingdom—if at all. The UK government has taken ahigh-risk approach to juggling health and the economy,aggressively reopening society without restrictions and relyinginstead on a high percentage of its population to be vaccinated. Major forecasters expect the economy to reach pre-COVIDactivity in first-quarter 2022.

The possible emergence of new variants of the virus that are lessresponsive to existing vaccines is still a major source ofuncertainty. The recovery in UK consumer spending has beenstrong in recent months, which continues to mask the effects ofBrexit on trade. In July 2021, food-related spending returned to2019 levels, according to Fable Data based on credit card outlays. The positive impact from the rush of many to dine out aftermonths of restrictions, however, will quickly wear off.

A job support scheme that included furlough subsidies to savepeople from being fired has cushioned the effects of COVID onthe UK economy. This support will end in September, and whenits influence wears off, further employment losses are expected, possibly weakening household spending. Many economistsexpect weaker household spending to tip the economy into aneconomic slowdown due to these employment losses and risingcosts for logistics, energy, and labor.

In addition, the UK dairy industry continues to face requirementssimilar to those the European Union has imposed on its farms tolimit environmental footprints and uphold impeccable welfarestandards. Meanwhile, UK producers are dealing with shortagesof labor and the higher costs of inputs resulting from separationfrom the European Union, and that will make future growthharder to sustain.