Brexit - agricultural sectors: analysis of impacts

6. Brexit Impact – Dairying

6.1 Tariff Impacts

Tariffs applicable within the dairy sector are complex and the UK Government's Global Tariff schedule contains 151 tariff lines for dairy commodities with additional products (e.g. proteins and pet food) also containing significant amounts of dairy ingredients. For the purposes of this study, the tariff information presented on UK imports and exports is based on the top-5 most frequently traded dairy commodities between the UK and the EU. This includes two categories of butter, hence six tariff lines are shown. It does not include liquid milk because the vast majority of this trade relates to cross-border movements on the island of Ireland. The industry experts participating in this study suggest that overseas liquid milk trade from Scotland is negligible. That said, it is a key feature of internal UK trade with England and Wales, so would become a major issue if trade barriers were to arise within the UK in future.

6.1.1 UK Imports

Table 6‑1 shows the estimated tariffs that would be applicable on imports of selected dairy products into the UK from both the EU and non-EU in the event that the UKGT becomes applicable from January. These estimates are presented in AVE terms. However, as Annex III shows, tariffs for dairy products more frequently combine a specific component (e.g. £10/100kg for yogurt (HS code: 04031091)) and a percentage component (e.g. 8% for yogurt). These are called compound tariffs. There are also examples of dairy tariffs being based on a fixed amount (e.g. £158/100kg for butter).

With this in mind, Table 6‑1 shows that for imports from the EU, the application of the UKGT would have a major impact on the competitiveness of EU produce. For cheese, the estimated tariffs would range from 25% (processed) to 53% for cheddar and mozzarella. Tariffs for butter imports from the EU would be in the 36-40% range, with yogurt tariffs estimated at 17% AVE. This would make it very difficult for EU competitors such as Ireland and the Netherlands, for whom the UK is a major market.

Table 6‑1: Estimated Tariffs for UK Imports of Dairy Products – 2017-19 (AVE%)

HS Code	Description	EU		Non-EU
		£/t	AVE%	£/t	AVE %
04031091	Yogurt	1,166	17%	1,542	14%
04051011	Natural butter of a fat content, by weight, of >= 80% but <= 85%, in immediate packings of a net content of ≤ 1kg)	4,418	36%	12,951	12%
04051019	Natural butter of a fat content, by weight, of >= 80% but <= 85% (in packings of > 1kg net)	3,936	40%	2,828	56%
04061030	Fresh Mozzarella, whether or not in a liquid, of a fat content, by weight, of <= 40%	2,925	53%	4,155	37%
04063031	Processed cheese, not grated or powdered, of a fat content, by weight, of <= 36%)	4,722	25%	12,978	9%
04069021	Cheddar (excl. grated/powdered and for processing)	2,615	53%	3,341	42%

Sources: HMRC and Andersons

In many cases, the estimated tariffs for UK imports from non-EU countries are lower in AVE terms, chiefly because of the relatively high prices used, based on HMRC data. However, these price estimates need to be treated with caution. For instance, imports of butter in packs of ≤1kg averaged at approximately £33,000 per annum during 2017-19. Corresponding imports from the EU averaged at almost £115 million. There are similar issues with processed cheese where non-EU imports were just over £100,000 (high-end product with different price structures) whilst EU imports surpassed £121 million.

Overall, the estimates suggest that in a No Deal Brexit, imports from the EU would become uncompetitive in most cases and this would present opportunities for domestic UK producers, provided that any trade deals that the UK completes post-Brexit (e.g. with New Zealand and Australia) do not grant those countries with significantly increased market access.

6.1.2 UK Exports

For UK dairy exports to the EU, the application of the EU Common External Tariff (CET) would exert a severe negative impact, as shown in Table 6‑2. As Annex III also shows, the EU CET for dairy products are structured in a similar manner to the UKGT. When expressed in AVE terms using 2017-19 trade data, the tariffs for cheese range from 31% to 55%. Cheddar has a 45% tariff. Tariffs for butter would surpass 40% and would be made uncompetitive, whilst the AVE tariff on yogurt (19%) would erode the UK's competitive position, although some exports might still be possible, particularly if Sterling is weak.

Table 6‑2: Estimated Tariffs on UK Dairy Product Exports to the EU27 – 2017-19 (AVE %)

HS Code	Description	Price £/t	AVE %
04031091	Yogurt	1,007	19%
04051011	Natural butter of a fat content, by weight, of >= 80% but <= 85%, in immediate packings of a net content of ≤ 1kg)	4,103	41%
04051019	Natural butter of a fat content, by weight, of >= 80% but <= 85% (in packings of > 1kg net)	3,934	43%
04061030	Fresh Mozzarella, whether or not in a liquid, of a fat content, by weight, of <= 40%	2,982	55%
04063031	Processed cheese, not grated or powdered, of a fat content, by weight, of <= 36%)	3,997	31%
04069021	Cheddar (excl. grated/powdered and for processing)	3,314	45%

Sources: HMRC and Andersons

As with imports of EU dairy products into the UK, a No Deal Brexit would deal a severe blow to UK exports to the EU. On balance, the UK should be able to engage in import substitution so that domestic sales could replace lost exports to the EU. For many dairy products, the UK is not self-sufficient, so either the domestic dairy industry would need to expand (creating short-term issues around product mixes and processing capacity) or the UK would have to secure trade deals elsewhere, or lower its tariffs, in order to meet its supply needs without increasing consumer prices significantly.

6.2 TRQ Impacts

As with cereals, TRQs provide opportunities for a limited quantities of dairy imports to continue to access the UK market at low, or much reduced tariff rates. Table 6‑3 sets out the division of EU28 TRQs between the UK and the EU27. For butter, just over 27.5Kt tonnes (32% of total) will be allocated to the UK, via a TRQ that only New Zealand has access to. Therefore, the 69Kt of butter exported from the EU27 to the UK would be unable to access the UK via TRQs and tariffs would be payable.

For cheese, the allocation to the UK (circa 9Kt) represents just under 11% of the total EU28 TRQ. This is mostly for cheddar cheese from both Canada (4Kt) and New Zealand (2.6Kt). New Zealand would also have the opportunity to export 2.3Kt of other cheese to the UK. Opportunities for the EU27 to access the UK cheese market via TRQs would be minimal with just 64 tonnes of cheddar available.

For UK exports, there would continue to be opportunities to export some volumes of butter and cheese (via TRQs allocated on an Erga Omnes basis) and would be subject to in-quota tariffs of approximately 21% and 6% respectively^[25]. However, the UK would be up against global competitors like New Zealand. Furthermore, as Irish cheddar and butter exports would effectively be shutout of the UK market, Irish producers will be under pressure to export greater volumes to other EU countries, thus lowering prices in the EU27. Again, this would indicate that the UK would be best positioned to supplant EU27 imports with domestic produce. For butter, UK exports to the EU27 (35Kt) are approximately half of the corresponding imported volumes. For cheddar, the UK exported approximately 68Kt to the EU27 during 2017-19, whilst 107Kt arrived from the EU, mostly Ireland. For some speciality chesses (e.g. Emmental, Feta, Gouda etc.), it is likely that significant volumes will continue to arrive from the EU27, albeit with tariffs applied (in excess of 30% in many cases) which will significantly increase consumer prices.

Table 6‑3: Proposed Division of Selected EU28 Dairy Import TRQs between EU27 and UK

Description	Country	Order No.	EU28 (t)	EU27 (t)	EU27 Share (%)	UK (t)	UK Share (%)
Skimmed-milk powder	Erga Omnes	94590	68,537	68,537	100%	0	0%
Butter	Erga Omnes	94599	11,360	11,360	100%	0	0%
Butter	NZ	94182, 94195	74,693	47,177	63.20%	27,516	36.80%
Total Butter			86,053	58,537	68.0%	27,516	32.0%
Cheese (pizza)	Erga Omnes	94591	5,360	5,360	100%	0	0%
Cheese -Emmental	Erga Omnes	94592	18,438	18,438	100%	0	0%
Cheese (Gruyère, Sbrinz)	Erga Omnes	94593	5,413	5,413	100%	0	0%
Cheese (processing)	NZ	94515	4,000	1,670	41.70%	2,330	58.3%
Cheese (processing)	Australia	94522	500	500	100%	0	0%
Cheddar	Erga Omnes	94595	15,005	14,941	99.6%	64	0.40%
Cheddar cheese	NZ	94514	7,000	4,361	62.3%	2,639	37.7%
Cheddar cheese	Australia	94521	3,711	3,711	100%	0	0%
Cheddar cheese	Canada	94513	4,000	0	0%	4,000	100%
Other cheeses	Erga Omnes	94596	19,525	19,525	100%	0	0%
Total Cheeses			82,952	73,919	89.1%	9,033	10.9%
Total Dairy Products			237,542	200,993	84.6%	36,549	15.9%

Source: Council of the European Union (2018), Andersons (2020)

Subject to in-quota tariff (€948/t), equating to 21.4% AVE on 2017-19 trade for UK exports to the EU27.

Subject to an in-quota tariff of €210/tonne, equating to 5.6% in AVE terms on 2017-19 trade.

6.3 NTM Impacts

The estimated NTM AVEs are provided for selected dairy products in Table 6‑4. These are provided on a probability basis (further information on "checked loads" is in Annex III). Checked (unlucky) loads are subject to the full range of regulatory checks. Probability-based estimates are averaged out over 100 loads and takes account of physical check rates (10% under an FTA, similar to CETA and 30% under a No Deal^[26]). For SMEs that export relatively few consignments (e.g. less than 50 per annum), the impact of a load being subject to the full range of regulatory checks is far greater than for a large company dispatching scores of loads each week.

For more perishable products such as yogurts, NTM AVEs are more sizeable ranging from 2.8% to 7%. As yogurts are lower priced than other dairy products (£1,166/t for imports and £1,007/t for exports), NTM costs are higher in AVE terms due to certification costs etc. being spread across a lower load value.

Butter NTM AVEs are significantly lower than yogurts because it is higher priced, much less perishable, and therefore, only subject to small levels of value deterioration. Estimated AVEs range from 0.8% to 1.8%. This implies that whilst NTMs will add bureaucracy and the need to carry greater stocks to mitigate the impact of regulatory checks, their impact would be small. Under an FTA scenario, this would permit trade to continue much the same as present: a view shared by most primary research interviewees.

For cheese products, NTM AVEs range from 1% to 2.7%, with estimates under an FTA scenario generally 1 percentage point lower than their No-Deal equivalents. The AVEs are somewhat higher for cheese than butter due to their lower prices, based on HMRC data.

Overall, the NTM estimates presented here align well with the primary research input, suggesting that although these costs could be problematic in specific cases (e.g. load being subject to the full range of physical checks, where AVEs often surpass 25% in a No Deal scenario). On the whole, they are not of grave concern. Some interviewees suggested that the NTM cost estimates put forward by other studies (e.g. 8% cited by a recent LSE study^[27]) were over-estimating their true costs. The results presented in Table 6‑4 tend to support this viewpoint.

Table 6‑4: Estimated NTM Costs - Selected Dairy Products for UK-EU Trade (AVE %)

HS Code	Description	UK Imports from EU27		UK Exports to EU27
		FTA	No Deal	FTA	No Deal
04031091	Yogurt (LoLo)	3.7%	6.1%	4.3%	7.0%
04031091	Yogurt (RoRo)	2.8%	5.4%	3.2%	6.2%
04051011	Butter (packs ≤1kg) (LoLo)	1.0%	1.6%	1.1%	1.8%
04051011	Butter (packs ≤1kg) (RoRo)	0.8%	1.5%	0.8%	1.6%
04051019	Butter (packs >1kg) (LoLo)	1.1%	1.8%	1.1%	1.8%
04051019	Butter (packs >1kg) (RoRo)	0.9%	1.6%	0.9%	1.6%
04061030	Fresh Mozzarella (LoLo)	1.5%	2.4%	1.5%	2.4%
04061030	Fresh Mozzarella (RoRo)	1.2%	2.1%	1.1%	2.1%
04069021	Cheddar (LoLo)	1.7%	2.7%	1.3%	2.1%
04069021	Cheddar (RoRo)	1.3%	2.4%	1.0%	1.9%
04063031	Processed Cheese (LoLo)	1.7%	2.7%	1.3%	2.1%
04063031	Processed Cheese (RoRo)	1.3%	2.4%	1.0%	1.9%

Source: The Andersons Centre (2020)

6.4 Labour

Migrant workers feature quite prominently within the Scottish dairy processing sector. That said, given the more year-round nature of operations, migrant workers tend to be employed on a full-time basis. Industry participants contributing to this study believe that most workers would quite easily obtain 'Settled Status'. Again, there was an acknowledgement that sourcing new workers from the EU could become more problematic in future, particularly if local labour was unavailable. This would, in turn, create inflationary pressures. Some believe that with the onset of the Covid Crisis recruiting indigenously could become more viable. There were calls for greater flexibility in the UK's post-Brexit migrant workers' schemes so that workers at an operative level could be recruited if needed (i.e. the salary thresholds were made attainable). Accordingly, whilst there is scope for labour costs to rise with Free Movement ending, it is not seen as that problematic in dairying (versus tariffs etc.) provided costs are marginal and could be passed on elsewhere. At farm-level, there could also be some impact on labour costs as there have been increasing numbers of East Europeans working on dairy farms in recent years.

6.5 Effects on UK and Scottish Output and Trade

Table 6‑5 presents the Brexit scenario projections for the dairy sector arising from the tariff, NTM and TRQ analysis above. It focuses on three key product areas namely, butter, cheese and the aggregated effect on UK milk production and farmgate prices. Thereafter, an analysis is provided for each Brexit scenario.

Table 6‑5: Projected UK Dairy Output by Brexit Scenario

	2017-19 Baseline	FTA 2021 % Ch	FTA 2025 % Ch	No Deal 2021 % Ch	No Deal 2025 % Ch
Butter
Output (£m)	756	0.8%	0.0%	13.8%	12.6%
Output (Kt)	157	0.0%	-0.8%	-5.8%	-6.8%
Consumption (Kt)	191	0.0%	0.0%	-1.3%	-0.8%
Prices (£/t)	4,804	0.8%	0.8%	20.9%	20.8%
Exports (Kt)	46	0.0%	0.0%	-2.3%	-2.4%
Imports (Kt)	80	0.0%	0.0%	3.7%	3.9%
Cheese
Output (£m)	1,463	1.5%	1.5%	37.4%	37.9%
Output (Kt)	434	0.2%	0.2%	3.4%	3.6%
Consumption (Kt)	777	-0.1%	-0.3%	-1.8%	-5.5%
Prices (£/t)	3,374	1.3%	1.3%	32.9%	33.1%
Exports (Kt)	85	0.0%	0.0%	4.4%	6.1%
Imports (Kt)	428	-0.2%	-0.7%	-5.2%	-12.0%
Milk Supply & Demand
UK Milk Output (£m)	4,424	0.6%	0.6%	14.6%	14.3%
Overall UK Milk Production (Kt)	14,933	0.2%	0.2%	4.7%	4.1%
Consumption (Drinking Milk) (Kt)	14,103	0.0%	0.0%	-0.5%	-0.5%
Farmgate milk prices (ppl)	29.6	0.4%	0.4%	9.4%	9.8%

Sources: Andersons, Defra and WUR

6.5.1 Butter

FTA Scenario

As in other sectors, relatively minor changes are projected. Any changes which are forecast are chiefly a reflection of the imposition of NTMs on cross-border trade with the EU. In the short-term output value rises, driven by a corresponding increase in prices. However, there is little change in production volumes or quantity of imports or exports and as a result, consumption remains largely unchanged. Longer-term, the production volume declines, despite prices retaining their 0.8% premium on the Base. This is partly due to milk being used elsewhere, particularly in cheese production.

No Deal

Here, the changes are much more pronounced as tariffs are imposed on imports from the EU from 2021. Prices are estimated to rise by almost 21% and this, in turn, helps to drive revenue increases of nearly 14%, despite a 5.8% drop in production volumes. Although the UK is an importer of butter, it is being out-competed by cheese, where price increases are in the region of 33% and is viewed as being more favourable to produce based on Agmemod modelling. Due the increased prices domestically, it is unsurprising that imports rise by 3.7% short-term. It is anticipated that this will be mostly from the likes of New Zealand (which has a TRQ) and other countries where, despite the tariffs, the domestic price increases will make the UK attractive. The EU is expected to lose out. As Agmemod does not segment EU and non-EU imports it is not possible to deduce by how much EU imports decline.

Longer term, the price and output gains will fall back slightly, but prices are still attractive enough to permit a further slight rise in imports. Consumption is 0.8% lower than the Base with higher prices causing reduced demand. Output remains lower as milk usage tends to be utilised by the cheese sector.

6.5.2 Cheese

FTA Scenario

Again, small increases in output value (+1.5%) are forecast due to price increases of 1.3%. Production quantity is also marginally higher as NTM costs decrease the competitiveness of imports from the EU27. The higher prices also mean that more UK cheese is used domestically, despite the slight decrease in consumption. These findings reflect the primary research input which suggests that the imposition of trade barriers under an FTA scenario would bring some small benefits to British cheese producers.

No Deal

As noted above, the 33% increase in prices will drive increased production in the short-term and lead to output value rising by over 37%. Given the extent of these price increases, it is unsurprising that consumption falls (by 1.8% short-term). Arguably, one might anticipate that such a price increase would lead to a greater decline in demand. However, some industry participants opined that demand for cheese would hold up quite well under a No Deal and some imports of high-end continental cheeses would continue, despite tariffs. This opinion appears to be substantiated by the Agmemod projections where short-term imports are forecast to be 5.2% lower, but have not collapsed. As with butter, a greater proportion of imports are likely to come from non-EU countries, attracted by the higher UK prices.

Long-term, a further slight increase in prices is forecast as the UKGT safeguards the domestic UK market. However, the willingness of consumers to continue to bear such high prices dissipates as UK domestic consumption declines by 5.5% against the Baseline projections. This in turn affects imports which are forecast to decline by 12% against the Baseline in 2025. As UK exporters adjust to the changed conditions, more are likely to focus on the domestic market as it is easier to fulfil domestic demand than serving overseas markets.

6.5.3 Impact on Overall Milk Production and Prices

Although Agmemod produces projections for several other dairy commodities (e.g. cream and milk powder), these have not been focused on in this Summary Report. Instead, to relate the dairy market changes to the situation at farm-level in the UK and Scotland, Table 6‑5 also includes projections for overall milk production and prices in addition to butter and cheese.

FTA Scenario

Reflecting the FTA forecasts for butter and cheese, relatively small changes are anticipated if the UK agrees a trade deal with the EU. However, some upturn in farmgate prices (+0.4%) is forecast which, as Section 6.5.4 shows helps to boost farm incomes slightly. Drinking milk consumption, traditionally accounting for nearly half of British milk production is not projected to change.

No Deal

Output is forecast to rise by over 14% driven mainly by buoyant prices for products such as cheese and butter on the UK market. Drinking milk consumption is forecast to decline only slightly (-0.5%) as it is a staple product and its' demand is relatively inelastic. For farmers, price rises exceeding 9% are forecast which would be a significant boost to incomes. This in turn drives production increases (4-5%). This reflects the views of industry participants that the dairy industry is one of the farming sectors most likely to gain from the imposition of trade barriers with the EU.

Two key caveats merit mention in a No Deal scenario. Firstly, the NI Protocol which is designed to protect the all-island economy in Ireland coupled with the UK Government's promise of "unfettered access" to the GB market could mean that the significant volumes of milk (circa 700 million litres/year) transported from NI to the Republic for processing are likely to be brought back into NI again, subject to some limited additional processing, and sold as British on the UK market. It is also conceivable that milk produced in the Republic of Ireland and exported to GB directly, could also be routed via and further processed in NI, thus enabling it to qualify for unfettered access as well. It is possible that this could account for a significant proportion of the production increases for dairy products in the UK market.

As with other sectors, if the UK completes FTAs with the likes of New Zealand and the US which permits a significant increase in imports from these countries (at lower prices), then much of the gains that farmers might be able to achieve would be eroded.

6.5.4 Implications for Scottish Milk Output

To illustrate the impact of Brexit scenario over the short-run (2021) and long-term (2025), Figure 6‑1 depicts the impact of the percentage changes in milk production and value forecast by Agmemod and applies them to Scottish output estimates vis-à-vis the 2017-19 period (Base). As noted above, minimal changes occur under an FTA, provided the UKGT schedule is applied and safeguards Scottish producers.

Under No Deal, Scottish output is forecast to increase by about £57 million in the short-term as markets adjust to the sudden imposition of tariffs and trade barriers with the EU. Longer-term some of these gains are eroded slightly but still some £55 million ahead of the Base period. This translates into a 65 million litre increase in milk production in 2021 which decreases slightly in 2025 to 1,385 million litres. On the face of it, the increased output looks positive for farmers. That said, the caveats above calls for these projections to be treated with some caution. Furthermore, some industry participants expressed concern that significant volumes of Scottish milk are being processed in England. If milk production increases in England as well, then the ability of Scottish milk to be processed south of the border comes under pressure. This would suggest scope to increase processing capacity in Scotland. However, this requires certainty that demand will remain long-term and will not dissipate due to trade deals that the UK completes elsewhere, be that New Zealand, the US or even the EU.

Chart Description

Shows the impact of both Brexit scenarios on Scottish milk output in both monetary and tonnage terms for 2021 and 2025 against the 2017-19 Baseline.

Sources: Andersons and Wageningen University and Research (WUR)

6.6 Implications for Scottish Dairy Farming

Table 6‑6 summarises the projected farm-level impacts of both Brexit scenarios, using averaged data on dairying from the Scottish FBI publication. Milk output has been separated out from other livestock output (which is dominated by cattle). Only the Brexit-related impacts concerning trade and input costs have been modelled, support remains the same. Looking at dairy products overall, the UK is not self-sufficient. This means that the imposition of trade barriers leads to slight price increases (+0.4%) at the farmgate. Variable costs, especially imported inputs, veterinary and medical (and casual labour) rise due to the combination of border frictions and the ending of Free Movement. Fixed costs, particularly regular labour also rise. However, on the whole the agricultural production margin rises by 2.3% and when support (unchanged in both scenarios) is factored in, the overall business surplus increases by 1%.

The No Deal scenario, with the imposition of the UKGT schedule, sees a protected UK market where prices for milk (and beef) can rise. The farmgate milk price increase (9.4%) combined with the significant increases in cattle prices (see Chapter 7) mean that livestock output is up by over 10%. Variable costs decline marginally (-0.3%) due mainly to the decreased barley prices. This contributes to a 1% decline in feed costs generally as there are other feed ingredients also used and not all of the benefits of a price decline would be passed onto farmers. Elsewhere, veterinary and medical costs rise by 8% due to greater demand on veterinary services for sanitary and phytosanitary tasks.

Despite some cost increases, margin from production nearly trebles meaning that the overall business surplus is projected to rise by over 75%.

Table 6‑6: Projected Impact of Brexit Scenarios on Scottish Dairy Farms

Parameter	18/19 (Base)	FTA	% Ch.	No Deal	% Ch.
Milk Output (excluding support)	563,838	505,881	0.4%	551,229	9.4%
Other Livestock Output (excl. support)	59,972	60,630	1.1%	69,835	16.4%
Total Livestock Output (excl. support)	623,811	566,511	0.5%	621,065	10.1%
Livestock-Specific Variable Costs	263,618	264,488	0.3%	262,808	-0.3%
Livestock-Specific Gross Margin	300,220	241,393	0.5%	288,421	20.1%
Total Agricultural Output	583,979	586,651	0.5%	640,660	9.7%
Total Agricultural Variable Costs	300,476	301,689	0.4%	300,771	0.1%
Total Agricultural Fixed Costs	252,344	253,098	0.3%	255,171	1.1%
Margin from Agricultural Production	31,159	31,864	2.3%	84,719	171.9%
Agricultural Support	39,572	39,572	0.0%	39,572	0.0%
Agricultural Business Surplus	70,731	71,435	1.0%	124,290	75.7%

Sources: Scottish Government (Scottish Farm Business Income (FBI) Publication) and Andersons

6.7 Concluding Remarks

In comparison with sheepmeat (see next Chapter), the impact of Brexit on Scottish dairying is likely to be more positive. Admittedly, relatively little change is forecast under the FTA scenario, but under a No Deal farm profitability could theoretically be boosted significantly. Added friction should support domestic prices, provided that key export markets for cheddar are safeguarded and that adequate processing capacity exists for increased milk volumes. This latter issue is crucial for Scotland as it does not have the capacity to process all of its milk.

As noted throughout this Chapter, if the UK strikes trade deals with the likes of New Zealand and substantial volumes of Irish dairy products continue to find their way into the GB market (provided they qualify under the NI Protocol), then then the farm-level gains would be dampened considerably.