Thursday 20 June 2019

Samantha McCaughren: 'Hard Brexit would be very hard cheese for our dairy industry'

Half the cheddar made in Ireland goes to the UK
Half the cheddar made in Ireland goes to the UK
Samantha McCaughren

Samantha McCaughren

With days to go to the UK's scheduled exit date from the EU, the real difficulties a hard Brexit would deliver for the Irish food industry have begun to emerge. And it's not a pretty picture.

Ornua, which exports Irish dairy products on behalf of its members, the county's dairy processors and farmers, has a huge challenge ahead. How do you draw up contingency plans for the severe disruption of products which generate hundreds of millions of euro in annual sales?

Ornua CEO John Jordan remains upbeat regarding the potential problems ahead. While accepting that even the best Brexit will cause challenges for the Irish cheese business, he is confident that the industry will thrive and overcome this incredibly frustrating turn of political events.

For Jordan, Ornua and its members are used to dealing with uncertainty.

They sell Irish dairy products into markets where prices fluctuate widely and currencies constantly change in value against the euro.

They deal with market disruptions such as swings in demand in China or sudden closure of markets due to sanctions or other political events.

They constantly monitor the weather in New Zealand and in dairy-farming regions of the US to gauge the likely supply of products onto world markets.

Jordan and his team already have as much responsibility for risk management as any management team might reasonably be expected to handle. And now they have Brexit.

This year, Ireland's 18,000 dairy farmers will produce over seven billion litres of milk from 1.4 million cows. That compares with around five billion litres from one million cows just five years ago when EU milk quotas ended.

Only about 5pc of that milk is consumed as liquid milk. All the rest is processed into products such as cheese, butter and dairy powders, and over 90pc of those products are exported.

The UK takes a quarter of all our dairy exports, and UK businesses pay around €1bn annually for Irish dairy products. However, the UK market is even more significant than those figures would suggest - it takes around half of Ireland's cheese exports and a quarter of Ireland's butter exports, thereby providing a vital outlet for a large and valuable slice of Ireland's total dairy output.

Most Irish dairy processors sell into export markets through Ornua, which is owned by the processors.

In some ways, Ornua's task is simple: return the maximum price to the processors so that they can pay the highest possible milk price to farmers. A processor typically gets somewhere between 45 and 50 cent for the products that it produces from each litre of milk. Its total processing costs are around 15 cent per litre, and the balance of around 30 cent per litre is paid to the farmer.

As world dairy markets fluctuate, these numbers vary, and that alone presents Ornua with major challenges.

Jordan was frank when he spoke with me last week. Even with the best Brexit possible, costs will go up.

"Any change in the status quo today will be detrimental in that adds costs into the supply chain," he said.

"There would be more documentation, more paperwork, more administration costs regardless of what happens."

Even if there were no tariffs, Ornua estimates cost increases of 6pc to 8pc for administration. In addition to that, there could be a weak sterling post-Brexit which would add to the shelf price of Irish products.

"And at the extreme end of that, where there is a WTO regime, and there are tariffs, if you're talking about cheddar, a 50pc increase on the price today... if that causes food inflation, there is not enough margin in the supply chain from farmer to consumer, which means price increases.

"There's definitely a risk in a hard Brexit that value will come out of the supply chain, that if we can't recover that from the customer all of us get pinched from the sellers to the processors, through to the farmers."

Ornua is taking a number of steps to mitigate this and while there is clearly a very significant downside to a hard Brexit, Jordan is optimistic about the resilience of the industry. Cheddar is heavily dependent on the UK. Ornua' s butter is not, with Kerrygold - a massive success story - hugely popular in Germany, France and the US. The other big export product, milk powders, is not dependent on Europe.

New markets for cheese is one option being pursued, all be they less lucrative than the UK. The UK exports 75,000 tonnes of cheddar and if Irish produce can't get into the UK because of hefty tariffs, UK cheese won't be able to get out. Ornua has identified these customers and will target them. Much cheddar demand is from former British colonies.

Even if Irish cheese loses access to the UK, it will do its best to continue to supply its customers until Irish cheese can hopefully return to the market. Ornua employs 1,000 people in plants in the UK and will if necessary use British cheddar to supply customers - it already uses some British cheddar.

Ornua has also trialled alternatives to the UK land bridge, bringing yogurt to Germany via ship.

Ornua has 'stockpiled' or warehoused stock but Jordan said that it's possible trucks will be in short supply, stuck at various ports delaying deliveries. Even with the best planning, uncharted territory lies ahead.

Jordan's verdict? "Our view is if anything is not as it is today, the first few weeks are going to be hectic."

And that's putting it mildly.

Sunday Indo Business

Also in Business