On this bonus episode of HighGround Dairy’s podcast, Let’s Chat Markets, Alyssa Badger sits down with UK & EU analyst, Chris Walkland to discuss key dairy fundamentals in the UK and EU including Brexit, input cost concerns, COP26, UK exports, and cost of production for dairy. This interview can be streamed here and we have included a transcript below as well.
Alyssa:
Welcome back to another episode of Let’s Chat Markets. We’re going to do something a little different this week because we have a very special guest from across the pond to help fill us in about what’s going on over there as we continue to see headlines about Brexit and climate action overseas and we just wanted someone to come on in and give us a bit of clarity and what is actually it going on.
We have Chris Walkland with us today. He is an agricultural journalist, market analyst and consultant specializing in the dairy sector within the UK and Europe. He has written about the industry for around 25 years on all aspects of the dairy supply chain from primary production on-farm through to the economics and politics at processor, retailer, and consumer level. He also writes the fortnightly dairy market report for The Provision Trade Federation, which is a trade body that represents many of the UK’s processors as well as articles within the Farming Press. So, where exactly are you in the UK, Chris? Help fill us in so we can picture where exactly you are.
Chris:
Well if you imagine the shape of the UK and you stick a pin in the middle of it and you try to twirl the UK so it spins, I’m at the end of that pin. About 10 km away from me, there is a statue that says, “this is the middle of the United Kingdom.”
Alyssa:
Well, there we have it! That’s perfect.
Chris:
I’m bang in the middle.
Alyssa:
Awesome. Well, I hope to be able to come to visit and see that statue for myself in the near future here.
Chris:
You are very welcome.
Alyssa:
Well, I think we should just start simple here: what did Brexit actually do to Britain’s dairy industry? I know we’re still very much in it and it is still impacting what’s going on over there and we know what we see in the headlines: the empty shelves in supermarkets, the lack of truckers impacting the supply chain. What are the actual main areas of focus? What did we miss?
Chris:
Well, let’s start by saying what it didn’t do. Brexit could have been a disaster for the dairy industry but it wasn’t. It wasn’t a disaster because the EU and the UK came to an agreement on tariffs— there will be no tariffs and there will be no quotas. But, what it has done is it increased the hassle factor and the cost of doing business between the UK and Europe to such an extent that our exports are subject to a lot of EU border checks but their’s aren’t subject to border checks here. And, if you take a price, our cream price would be significantly lower—currently probably $0.50 to $0.60 lower than the European price on a per kilo basis.
Alyssa:
Oh wow.
Chris:
So, it has affected our incomes as an industry but was a big issue now is that we have a looming trade war which could mean we have tariffs again.
Alyssa:
Now, that’s all related to the Northern Irish Protocol, right?
Chris:
Correct. Basically, the UK and the EU did a deal with Northern Ireland because Northern Ireland is the only part of the UK with a land border to the EU. So, they came up with the Northern Irish Protocol to keep the free movement of goods—particularly meat and dairy—from the UK to the EU and the EU UK. But, because of the complications with business, because of the added cost, the UK basically wants to tear that up. The EU says that if you tear it up, they’ll be consequences. And the consequences of that is likely to be a trade war on tariffs. But it gets even more complicated than that because Biden is a passionate Irish descendant and he has wagged his finger at the UK government and said: if you screw up Northern Ireland there will be consequences. Now, if you go back to one of the main selling points for Brexit the main sell point for Brexit was a trade deal with America—of which dairy and meat would be apart. Currently, Biden has said no way, UK, you’re not getting your trade deal now. If we screw up the Northern Ireland Protocol and risk another period of instability and uncertainty in Northern Ireland, Biden will come down on the UK pretty hard.
Alyssa:
Wow, so it’s not just a trade war concerned within Europe and the UK—the US is getting involved
Chris:
The UK and the US’s relationship hinges significantly on the peace process in Northern Ireland, which is linked to the Northern Ireland Protocol, which is linked to Brexit. It’s real fun over here.
Alyssa:
Very complicated. We’ve seen a pretty solid rising in UK dairy moving into the US so there were really high hopes there and I imagine quite the repercussions and negative sentiment around that situation as far as finally moving product into US Borders.
All right, well here’s another one: no matter what part of the world we seem to be looking at, the true problem right now seems to be focused on input cost concerns. For Europe, specifically, is their infrastructure strong enough to cope with the rising energy and feed costs that are pretty widespread right now on a global scale?
Chirs:
Well, as far as Europe’s energy situation is concerned you really couldn’t make it up because Europe is, believe it or not, held to ransom by Vladimir Putin because a lot of Europe’s energy comes from Russia. So you’ll have heard of James Bond, will you, in America? Do you know James Bond?
Alyssa;
Oh yeah, we’re big fans.
Chris:
So it’s a bit like James Bond being reliant on his villains for all of his weapons and such. It is just ridiculous.
Alyssa:
Yeah, I’d say.
Chris:
It’s crazy. And, as far as feed markets go—again, the prices of feed are very reliant on how good or otherwise the Russian grain market is—we’re pretty linked over here. There’s no doubt that the costs that the processors are facing and the cost that the farmers are facing is really tanking milk volumes in Europe.
Alyssa:
We’ve noticed. I saw the German Consulting agency, ZMB, said that they’re expecting September figures to have been down around 0.5% below the prior year so it’ll be interesting to see those finalized here.
Chris:
Well, I had today that somebody said that they believe Germany might be now down 2%.
Alyssa:
Wow. Yeah, we’ve been seeing some wild figures come out of the weekly reporting out of France and Germany—just really ugly numbers there.
Chris:
We can’t see milk volumes in Europe or the UK picking up anytime soon.
Alyssa:
Absolutely. Here in the US as well, we’re struggling with some incremental milk difficulties and just being able to see some strong volumes. Our latest data that was out in September showed really muted growth and we’re not expecting milk production to really pick up anytime soon here, either. So, the Northern Hemisphere is in a bind, that’s for sure.
Chirs:
On the milk volume front, there is an interesting psychological difference between US farmers and certainly UK Farmers. I’m not sure about EU ones, though. But, when the milk price turns against the farm in America, the American farmers seem to cull very heavily. In the UK, the farmers will sell cows but what has happened in the past is other farmers have actually bought the cows. So, they don’t go out of the system and they’re not culled. However, I think there’s a new dynamic in place now whereby the cows will actually be culled and they won’t just be sold and uncirculated.
Alyssa:
Interesting—that’s pretty insightful, thank you. You know, given those higher input costs that are primarily focused on the energy situation, are we going to see a shift in product mix within Europe?
Chris:
Well, I think we will over the next few years because drinking milk consumption is under pressure in America, it’s on the pressure in the UK, and in Europe. Now, I don’t have a problem with that because nobody makes any money out of liquid milk over here.
Alyssa:
Yeah.
Chris:
It’s not profitable but butter and cheese and powders are all profitable. And, our domestic market is under pressure from the vegans, from the environmentalists and our retailers are also so competitive that they try to screw down the processes on their prices. At the same time, though, global markets are booming, their growth is more profitable, and the process is turning to those markets rather than the domestic market for their future aspirations and saying: well, why should we give product away to tight retailers when we can export it on the world market? And I think that, rather than the higher input costs, will be the main driver. That change in the market is a long-term thing—the energy costs are probably a medium-term thing—hopefully, a medium-term thing.
Alyssa:
I did see that Russia kind of turned on the spigot a little bit to move some more natural gas supplies into Europe so prices have come down a little bit.
Chris:
Putin is a master at playing the game, you have got to take your hat off to him. He has got us exactly what he wants us and how our politicians have allowed that to happen I really don’t know.
Alyssa:
It’s quite shocking. Speaking to what you mentioned earlier about the climate change concerns, we had that COP26 which is pretty topical with everything going on right now. What were some interesting reports or shifts that came out of that meeting?
Chris:
Okay, well I’ve go to set the scene from that and you would not believe some of the things that have happened at COP26. So basically, we have the world leaders come across to COP26 to lecture the rest of the world—the little people like you and me—on what they should be doing on climate change. So what did they do? Between 200 and 400 world leaders flew in on private jets. Some of them were flying every day from an airport called Glasgow Prestwick into Glasgow on a private jet. Now, this is the equivalent of flying from JFK to Teterboro—that close. But, they still came on private jets and they still lectured people on reducing meat and dairy consumption. Not only that, but the delegates that didn’t fly in chose not to take public transport chose to take cars in—private, hired cars—these hired cars were electric cars which is brilliant except the charging points were diesel-generated. So you can see the degree of hypocrisy that has been going on at COP26. Nevertheless, one of the main messages from our retailers is that consumers must cut their meat and dairy by 20% by 2030. They are still portraying dairy and livestock as the environmental villains and, frankly, our farmers are getting pretty cheesed-off. They’re really browbeating on the environmental front and sick to the back teeth of being the villains whereas, in actual fact, they could be the solution to climate change, not a problem.
Alyssa:
Wow, 20% by 2030—what are they going to stock the shelves with? Soy?
Chris:
Our retailers have signed this statement under pressure from the World Wide Fund for Nature which is a blueprint and a pledge with aspirational targets and everybody has to have those to do their part on climate change. But, people have to eat and I think people are forgetting that people have to eat and they’re saying things like: 80% of the land in the UK is grass for livestock and that’s terrible—without actually saying that you can’t grow anything else but grass in the majority of the UK. So, there is not a lot of joined-up thinking and they are pushing the plant-based diet and the plant-based agenda. I actually think that could be really good for dairy because plant-based things always taste better with a bit of butter and a bit of cheese. So, I think that would be good and what we’re seeing here is, although there is a drive to reduce meat-eating, the consumers are not reducing the protein. They’re switching meat to cheese and that is a massive opportunity for dairy. They’re not cutting their protein out and cheese demand is on a real growth curve, I think.
Alyssa:
Yes, even into Asia! It’s been wild to see those massive cheese imports, especially into China, take off for a similar reason. Speaking of cheese exports, the UK’s exports—we’ve seen cheese and cheddar exports into the US, out of the UK, increasing 23% this year. Volumes are pretty low but there seems to be some potential growth there in that market. How do you see it?
Chris:
Volumes are only around 3,000 tonnes but it’s a good market and what we’ve done, of course, we’ve cheesed off our nearest neighbors, the EU. And what the UK actually wants to do is instead of joining a trade block or being part of a trade block-—that’s effectively 20 km away—we want to join one that’s 11,000 km away. Instead of selling products into Europe, we want to sell products into America, New Zealand, and the Pacific countries.
I mean the whole policy is just bonkers but hey-ho that’s where we are. And, I do see growth opportunities in America, not least because the trade war over airbus is parked for a while—I don’t think it has completely gone away but the tariffs that were on between the UK and the US over airbus and Boeing I think have been parked. So, that’s giving a bit of a price opportunity for our exporters. That said, the cost of actually getting stuff to America or anywhere around the world with container costs has rather negated that.
Alyssa:
Yeah, the bottlenecks are pretty out of control. I think that’s aiding a lot of this inflationary pressure that we’re seeing on global commodity pricing because of those high shipping costs and nonetheless not being able to actually move the product out of our borders. We are certainly hearing about a lot of that from traders here in the US.
Chris:
I can’t see that changing anytime soon. But, that has implications for our market as well because we left the EU, our government is signing up trade deals all over everywhere. But, will the countries that we’re doing the trade deals with—Australia and New Zealand—actually have any dairy products to sell to us on a competitive basis, given those shipping costs? The GDT prices don’t add up and you can’t buy product on the GDT and then ship it to the UK. It just doesn’t add up.
Alyssa:
Right, yeah. Astronomical moves here on that auction and Fonterra hasn’t made any changes on offer volumes heading into next week but they’re certainly historically tight and the milk production out of New Zealand has been negative. So, just a lot of supportive factors here happening on a global scale.
Chris:
Yes, it was peak month last month for New Zealand and they were down 4% prior to that peak month. It’ll be interesting to see those New Zealand figures.
Alyssa:
Absolutely. I assume they will be pretty similar to September, down around 4%—pretty ugly there. Chris, before you sign off here—I really appreciate you spending time with us this morning, your afternoon—what does the cost of production look like at the farm level within the UK?
Chirs:
Well, at the moment our cost of production is, I would say, about $0.42 equivalent in your money. However, that’s likely to go up next year and the projected cost of production for 2022 is heading towards $0.46 and $0.47 and that’s a litre. So, pretty high. At the moment, markets are keeping pace with that, I would say, but only just. It’s going to be touch and go whether the farmers make a turn this coming year. I hope they do because with the volumes, the pressure, I think, will continue to be upwards.
Alyssa:
Yeah, those input costs and costs of doing business are rising everywhere it seems. All right, we’re going to wrap up this episode. Thank you so much, that was so insightful! I know our listeners are going to be excited to hear what you have to say and it’s tragic not to be able to see you in person for another year—hopefully next year!
Chris:
Yes, hopefully, next year and I would just like to sign off by saying: her majesty the queen sends all of the HighGround staff her very best wishes.
Alyssa:
Thank you so much, cheers!
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