Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Dairy UK

Executive Summary

1. Dairy UK represents the interests of dairy farmers, producer co-operatives, manufacturers of dairy products, and processors and distributors of liquid milk throughout the United Kingdom. Between them Dairy UK’s members collect and process about 85% of UK milk production.

2. Dairy UK proposes to address the issue of vaccination of cattle in relation to exports of milk and dairy products.

3. Our conclusion is that if vaccination of cattle were to be adopted without the agreement and support of the EU then, unless Regulation 853/2004 is changed (requiring the agreement of Member States voting by qualified majority), UK milk and dairy products which use milk from vaccinated cattle would lose their entitlement to their EC identification mark, and would be excluded from international trade.

4. The result would be an overhang of unused product or raw milk seeking an outlet in the UK. This would result in:

(a)a collapse in UK product prices with a resultant intense squeeze on processor margins;

(b)a consequential collapse in UK raw milk prices; and

(c)a contraction of the industry.

Background

2. The Environment, Food and Rural Affairs (EFRA) Committee on 8th November announced they would be carrying out a new inquiry into the vaccination of badgers and cattle in relation to Bovine TB.

3. The Committee wishes to receive evidence from interested parties on TB vaccinations for badgers and cattle, including the impact and challenges of vaccination on cattle and cattle products.

4. The Committee is inviting interested parties to address these and related issues in writing by Friday 11 January 2013. Dairy UK has requested that it be permitted to make its submission by 18th January, and this has been agreed by the Committee Clerk.

5. Dairy UK proposes to address the issue of vaccination of cattle in relation to exports of milk and dairy products.

Exports of Milk and Dairy Products

6. The European Union allows free movements of milk and dairy products within its borders on condition that these products meet the requirements of Regulation 853/2004 laying down specific hygiene rules for food of animal origin. These requirements cover both the raw milk used, and its processing into milk and dairy products.

7. Milk and dairy products meeting the requirements of the regulation must carry an identification mark (an oval containing the ISO code of the Member State (UK for the United Kingdom), the approval number of the establishment processing the product, and the abbreviation EC). Only products bearing such a mark are permitted to be traded across EU borders.

8. For raw milk, the requirement in terms of bovine tuberculosis is that raw milk must come from cows belonging to a herd which, within the meaning of Directive 64/432/EEC, is officially free of tuberculosis. However, raw milk from animals that do not meet this requirement may be used with the authorisation of the competent authority if they do not show a positive reaction to tests for tuberculosis, nor any symptoms of the disease, after having gone a heat treatment of at least pasteurisation.

9. There is no provision in Regulation 853/2004 for milk to come from animals which have been vaccinated against tuberculosis, and no category “officially free of tuberculosis where vaccination is practised”.

10. This leads to the conclusion that if vaccination of cattle were to be adopted, unless Regulation 853/2004 is changed (requiring the agreement of Member States voting by qualified majority), UK milk and dairy products which use milk from vaccinated cattle would lose their entitlement to their EC identification mark, and would be excluded from trade within the EU.

11. The potential economic impact on the industry is discussed in the annex below.

Conclusion

12. Unless Regulation 853/2004 is changed, vaccination of cattle against tuberculosis would mean that UK milk and dairy products using such milk would lose their entitlement to their EC identification mark, and would be excluded from trade with other EU Member States. Cattle in Scotland and Northern Ireland are unlikely to undergo vaccination so products from these parts of the United Kingdom might continue to be able to be exported. Depending on the extent of vaccination of cattle in England and Wales, either all exports to other Member States from England and Wales would be prohibited, or exports from those establishments using milk from vaccinated cattle.

13. In addition, it is possible that third countries might restrict exports from all parts of the UK if they were not satisfied that these products were made from milk from herds officially free or free from bovine tuberculosis.

14. Whatever the extent of the prohibition on exports, under any conceivable scenario, the UK dairy industry would be subject to a major price collapse and subsequent contraction.

17 January 2013

Annex

ECONOMIC IMPACT

1. The economic impact of the exclusion of any portion of the British dairy industry from trade within the EU would be potentially catastrophic, and it would lead to a severe contraction of the industry.

2. Exports of dairy products are responsible for a significant proportion of UK milk production. The latest annual figures for UK dairy exports cover 2011.

EXPORTS OF DAIRY PRODUCTS FROM THE UK 2011

Product

EU

Non-EU

Total

% of UK production

Raw Milk

495,675

0

495,675

3.6

Liquid milk

81,969

845

82,814

1.2

Cream

72,006

438

72,444

29.2

SMP

14,045

9,653

23,698

35.6

Whole milk powder

29,224

25,713

54,937

124

Evaporated and condensed milk

12,491

441

12,932

12.2

Yogurt

25,162

800

25,962

8.8

Butter

12,527

1,678

14,205

11.1

Cheese

110,080

13,513

123,593

32

of which processed cheese

19,336

350

19,686

54.7

of which Cheddar

33,905

7,515

41,420

16.6

3. Exports are clearly a significant percentage of production for a number of products. In total exports to the EU accounted for 16.0% of the volume of raw milk, (including cream and skim fractions) produced in the UK in 2011. Exports outside the EU account for another 3.3%, to give a total for all exports of 19.3%.

4. The extent of the potential damage from an EU export ban is difficult to assess accurately as it could involve a number of scenarios and separate data to quantify the effect on trade flows is not readily available.

5. Any ban on British dairy products in the EU would probably be replicated by a number of non-EU countries. The number of countries that would take this action is a matter of speculation; however, non-EU countries have in the past followed decisions by the EU when it has imposed trade restrictions on its members. The extent to which non-EU countries may do so would also be influenced by global market situation and whether prices were falling or rising. If prices were falling some countries would impose bans on UK product as an opportunity to renegotiate existing contracts.

6. Conversely, the impact of any EU wide ban on British exports may be mitigated by separate status being given by the EU to the devolved administrations. On several occasions in the recent past Northern Ireland has been treated by the EU as a separate geographic entity for the purposes of managing animal disease outbreaks by virtue of its separation by sea from Great Britain. This may again be acknowledged by the EU.

7. The exclusion of Northern Ireland from any EU trade ban would reduce the impact on UK exports as Northern Ireland accounts for a significant proportion of total UK trade in dairy products. This is especially true of milk powders. However, precise figures for the exports of dairy products from Northern Ireland are not available, but at a rough estimate they could account for over half of UK exports expressed in milk volume.

8. Conceivably similar treatment may be extended to Scotland or even certain regions of England. However this may not happen because of the absence of clear geographic separation from TB infected areas in England and Wales. It is not clear at this stage how the EU authorities may choose to respond. However, even if restrictions were imposed only on infected areas of England and Wales, this would still have potentially catastrophic consequences.

9. The impact of any ban could also be mitigated to a certain extent through import substitution. UK product previously exported from the UK could be discounted in the market to displace imports of dairy products.

IMPORTS OF DAIRY PRODUCTS INTO THE UK 2011

Product

EU

Non-EU

Total

Raw Milk

104,840

0.0

104,840

Liquid milk

65,223

4

65,227

Cream

56,091

0

56,091

Skimmed milk powder

44,017

28

44,045

Whole milk powder

20,239

45

20,284

Evaporated and condensed milk

41,856

46

41,902

Yogurt

147,267

866

148,133

Butter

69,069

4

69,073

Cheese

399,558

9,279

408,837

of which processed cheese

46,883

51

46,934

of which Cheddar

90,999

7,605

98,604

10. In total imports equate to nearly 38.5% of UK raw milk production. However, exports for certain products exceed imports, such as whole milk powder, and whilst some UK products could substitute for certain imports, such as cheddar, the majority of imports are for particular product types not manufactured in the UK, such as continental cheese varieties, branded products or products sold on provenance. This would place a limit on the extent of import substitution that could be achieved.

11. Overall, therefore, in any scenario that obstructs a significant volume of UK exports, the result would be an overhang of unused product or raw milk seeking an outlet in the UK. This would result in:

(a)a collapse in UK product prices with a resultant intense squeeze on processor margins; and

(b)a consequential collapse in UK raw milk prices.

12. Whatever the volume of product involved, any price collapse would inevitably be significant. This is because it is one of the characteristics of dairy products that as a staple consumer item demand is relatively insensitive to price. Consumers do not significantly vary their level of consumption in response to price changes. Consequently even small variations in supply can drive large price changes.

13. A definitive econometric analysis is not available but the experience of the world market is instructive. UK and EU prices now generally follow the price trend in the world market. Historically variations in global milk supply of around 1% can induce price changes in the order of 10%. Consequently even if the export ban was restricted to England and Wales, the industry would be subject to a severe price shock.

14. The impact on milk producers would vary. A portion of dairy farmers supplying milk for the production of liquid drinking milk are covered by contracts offered by major retailers in which the price is determined according to production costs. These producers would therefore not be affected by a fall in prices for dairy products.

15. These arrangements were entered into by retailers to ensure security of supply. Smaller retailers may therefore seek to enter into similar arrangements if they felt that any price collapse threatened to jeopardise the availability of liquid milk.

16. Retailers have not extended these arrangements to products that are available internationally, such as cheese. The continued availability of imports would mean that they would not have a commercial incentive to do so. The exception would be for those products were UK provenance was of importance. Consumer loyalty to product of British origin is of growing importance to the market, but it is limited to only a portion of the market.

17. This would leave a sizeable portion of UK dairy farmers being subject to prices that would inevitably be far below the cost of production. Current UK prices are at historic levels, but even now, producer lobbying organisations contend that they are inadequate to cover the cost of production. The cost efficiency of dairy farmers varies enormously, but not the extent that they could tolerate a prolonged fall in prices.

18. The UK dairy industry would therefore contract until either a market balance was restored by a cut in production, or access to export markets was regained. More significantly, if the UK dairy industry was unable to access export markets then it would not have the opportunity of participating in the growth in world demand for dairy products. The industry would be unable to grow to realise its full potential to make a contribution to the UK economy.

January 2013

Prepared 5th June 2013