Context Cheddar Type Cheeses- A Brexit Case Study Cheese is a key growth area for global dairy, with steady year on year growth in the category. This project is aimed at interacting directly with the 5 key players in the cheddar market in the south to ascertain as accurate a picture as possible of our exposure. The potential of a Brexit cliff edge scenario remains a major risk and acting in March 2019 to achieve the required diversification is not an option for our dairy industry. At present Irish industry cheese Capex decisions are already being impacted by potential restriction on access to the UK market, this is further complicated by the cheddar market globally being challenged in developed territories and difficult in developing territories. In terms of potential diversification the types of cheese that can be produced in cheddar plants is restricted to relatively narrow range of hard cheeses of a similar production platform to cheddar. The Industry is looking for market driven solutions with support of the Government as a better long term solution for our Industry- Brexit for us is here and outcomes are not in our control. Innovation will be essential to place product and to be competitive in certain markets. Milk is perishable, and while powders are relatively stable in storage- cheese by its nature is not. While wish to acknowledge the excellent work the Department and Government has done on Brexit so far the enormity of the diversification challenge cannot be over emphasised. Project Results Combined the 4 cheddar manufacturing companies above in 2016 had a total output of 205,752t of cheese. The 4 Companies severely dependant on Cheddar with the category 89.68% of output. Of this 56.48% is sold into the UK market, with a value of 271,589,100 to the companies involved. At punitive WTO tariff on the 96,888 t of southern Irish cheddar going into overall UK market would equate to 161,899,848 exposure to industry on cheddar exports should we maintain our 2016 volume share. While not a member- Dale Farm in NI is estimated to produce 50k t of Cheddar that can be currently marketed as Irish or UK- bringing a figure of around 235k t of Cheddar made on the Island annually. Irish Cheddar Production & Sales 2016 Total Cheddar Production (t) 184,509 Total Cheddar Export Figures (t) 171,551 Total Cheddar Imports (t) 2,100 Total Cheddar Export Value ( ) 464,655,185 Total Britain Cheddar Export Figures (t) 92,712 Total Britain Cheddar Export Value ( ) 258,755,100 Total NI Cheddar Export Figures (t) 4,176 Total NI Cheddar Export Value ( ) 12,834,000
Possible Cheddar Ireland Scenarios- Effect per year based on 2016 (see Annex1) The significant impact on the rural community of a lower value for milk should be emphasised. We calculate this at 116m per annum. [(96,888 tonne * 400)*multiplier (3) = 116.27m] Industry Asks & Potential Solutions Key Principles Industry and Government to coordinate and invest heavily in the immediate development and execution of a strategic plan for a Market Fund for the expansion of overseas markets and New Product Development within them. An aggressive Capex Investment to diversify infrastructure to adapt facilities for new core cheese products & functionality/ packaging formats etc. State Aid Ceilings need to be raised significantly by the EU as a Force Majeure derogation for the Irish case. (Cheese impact of 2014 Russian ban as evidence) Political Asks Events over the last week perhaps make the prospect of the UK remaining in the Customs Union more likely- this should be a key objective of Government. In the event of Brexit- as long a Transition Period as possible be agreed to allow business adjust to new realities. Other Comments Investment and plan in creating occasions for use for cheese/cheddar in non traditional markets. Significant continued support in Research & Development and product development that is driven by market insights. We need be mindful that diversification from Cheese will affect Whey streams that underpin our key Specialised Nutrition industries. Development of storage/port infrastructure/financing support to meet longer supply chains to service longer distance markets. More infrastructure support on certification requirements to meet increased volumes to be exported beyond EU. Current regimes such as the Vet 15 represent a significant barrier to trade. Continued high level lobbying and support on Free Trade Agreements / cooperation with other territories' authorities e.g. Mexico/Brazil as well as Asian countries. Work on driving Intellectual Property Rights in Irish Industry be used to help alleviate issues- Valio in Finland have invested heavily in Lactose Free to mitigate Russian Ban. Through examination of potential of existing precedences agreed by the EU such as the dairy focused Green Line regulation in Cyprus and the previous Special Economic Zone (SEZ) status of Kaliningrad to see if variations can be applied to the Irish context. Rules for inward processing be clearly set out by Revenue, UK Revenue & the EU. Special attention to minimise Regulatory Divergence in NI and the rest of the UK- Island wide common standards vital for Irish dairy reputation maintenance. Common electronic delivery system of certs and pre approval of export status for Ire/UK.
ANNEXES
Annex1. Figures behind the Scenario Matrix in the Study Diversification Story: Enormous Challenge for Cheddar
Annex 2. Other UK Cheddar & Dairy market Figures 2016 Official CSO & UK Figures: UK imported over 78k tonnes of Irish Cheddar out of 96k total Represented 82% of Cheddar imported on stats 10k t of Cheddar from other countries in UK Trade Stats. 47,442t Irish Cheese under the Speciality Category Industry Sources- Around as 120k t of overall Irish cheese to the UK per annum Circa 90k to Food Service/ 30k to Retail WTO tariffs are set at a punitive 1,671 a tonne for Cheddar (no indication UK would enforce that in the event of a hard Brexit but it represents the Worst Case) Key Irish Argument to EU Partners for a Deal- Displacement Example- Russian ban of 2014 UK Cheddar Market 2016: Overall Retail Volume & Sales (Kantar): 234,000t- 1,419m Branded: 84,000t - 576m Top 5 Dairy Crest Ornua Lactalis Wyke Arla
UK Private Label Market 150,000t (est) - 843m Irish Cheddar into own label been driven by Tesco- Others have gone Union Jack Cheddar into Food Service: 121,000t UK Cheese Trading stats: 75k t of Cheddar Exported in 2016 (out of 160k overall cheese exports) 78% of this to EU countries
Annex 3. CSO Dairy Baseline Figures for 2015 & 2016 Cheese/Cheddar Highlighted
Annex 4. State Aids Food Drink Ireland/Ibec State Aid Paper 2016/17 with Ciaran Fitzgerald Parliamentary Questions 2017 QUESTION NOS: 219,220 DÁIL QUESTIONS addressed to the Minister for Jobs, Enterprise and Innovation (Deputy Mary Mitchell O'Connor) by Deputy Niall Collins, for WRITTEN ANSWER on 26/01/2017 * To ask the Minister for Jobs; Enterprise and Innovation further to parliamentary question number 315 of 19 January 2016, if she or her department have asked DG Competition to review and increase the current state aid de minimus thresholds, by enterprise for each of the following specific enterprise stabilisation measures: State backed credit insurance, export trade financing, export credit guarantees and employment subsidy schemes, following the UK s decision to leave the EU; and if she will make a statement on the matter. - Niall Collins T.D. For WRITTEN answer on Thursday, 26 January, 2017. * To ask the Minister for Jobs; Enterprise and Innovation further to parliamentary question number 314 of 19 January 2017, if she or her department have asked DG Competition to consider increasing grant aid to a single undertaking to between 300,000-500,000 over a three year fiscal period as a policy response to safeguard Irish jobs and domestic enterprises that would be negatively impacted by the UK leaving the EU; and if she will make a statement on the matter. - Niall Collins T.D. For WRITTEN answer on Thursday, 26 January, 2017. REPLY. The Government is acutely conscious of the uncertainty created by Brexit and the need to consider the types of supports that Irish businesses require to address the negative implications of Brexit and maintain their competitiveness. The UK vote has led to uncertainty in our trading relationships with the UK, resulting in large part from a degree of volatility in the Euro/Sterling exchange rates. Exchange rate fluctuations will pose real challenges for low margin exporting sectors reliant on the UK market. The volatility of exchange rates is clearly evident from developments over the last few months. Given Brexit is likely to represent a structural shift in the UK trading relations with partners, short medium and long term responses are needed. These include market diversification, cost reduction, value-add, innovation and price repositioning. My Department and agencies are putting in place measures to address these issues for client companies. My Department, along with the Department of Finance, the Strategic Banking Corporation of Ireland (SBCI), Enterprise Ireland (EI) and stakeholders (such as SFA, ISME, IBEC and Chambers) is in the process of conducting a structured engagement with industry. The
purpose of this engagement is to deliver an evidence base, on which Government appropriate, tailored and targeted responses can be based to meet real identified business needs. Work on this is advanced and the outcome of this structured engagement may lead to further discussions on State Aid concerns. The Deputy will be aware that EU Regulation No 1407/2013 (the de minimis Regulation) sets out the rules for granting small amounts of financial aid to enterprises which are unlikely to affect trade and distort competition (de minimis aid). Generally, public bodies are allowed to grant aid to a single undertaking of up to 200,000 over a 3 year fiscal period without prior notification or approval from DG Competition. The Regulation requires that the aid is transparent. Specific arrangements on de minimis aid apply in the following sectors: - road freight transport sector - primary production of agricultural products - production, processing and marketing of fishery and aquaculture products. As part of the revision of the General Block Exemption Regulation (GBER) under the State Aid Modernisation Agenda, Member States and the Commission discussed a proposal to increase the de minimis threshold in 2013. A number of Member States suggested increasing the de minimis threshold to 500,000 over a three year fiscal period. The European Commission rejected the proposal on the basis that the amount was substantial and could distort the competition in the Internal Market. A more modest increase to 300,000 was also declined. The current State Aid framework does not allow for the re-calibration of aid intensity rates under the GBER or de minimis thresholds. My Department has also initiated engagement with senior officials from the DG Competition to ensure Ireland can deliver the necessary supports to Irish enterprises within the EU State Aid rules. These discussions are by no means over and will continue to address all relevant State Aid issues, if and when, the need arises to discuss initiatives or proposed schemes.